Passive income seems like an oxymoron (albeit an intriguing one): how can I earn money while doing nothing? How can anyone earn money while doing nothing?

It turns out that one way to earn money while doing nothing is by investing a sum of money in stocks and mutual funds that reap dividends. And the more you have invested as a shareholder, the bigger your dividend payouts will be.

What are Dividends?

Dividends are payments made by a corporation to its shareholders out of the profits earned. Dividend income can be in the form of cash, stocks, property, etc. However, not all stocks or mutual funds pay out dividends.

Choosing Funds with Dividend Payouts

Purchasing stocks and mutual funds that pay out dividends is a great strategy in building a secure financial future for you and your loved ones. 

You can do a search for dividend paying stocks and mutual funds by searching FinViz.com for free and screening for stocks with a certain percentage of dividend yield.

Taxes on Your Dividend Income

Whether you receive dividends payouts as cash or your dividends are reinvested automatically through a DRIP (Dividend Reinvestment Plan), your dividends are considered income to the IRS.  

Qualified Dividends. However, qualified dividend income is not taxed the same as your earned income from a 9 to 5 job reported on your W2 form. For dividends to be qualified under the rules below, the dividends must:

  • Have been received between between January 1, 2003 and December 31, 2012
  • Be paid by a U.S. corporation, by a corporation incorporated in a U.S. possession, by a foreign corporation located in a country that is eligible for benefits under a U.S. tax treaty that meets certain criteria, or on a foreign corporation’s stock that can be readily traded on an established U.S. stock market
  • You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.

If your dividends do not meet this qualification, then they will be taxed as normal income and subject to the standard tax rates.

Your 1099 form will show the amount of dividend income that is qualified in box 1b.

Dividend Tax Rates Extended

On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which extended the changes enacted to the taxation of qualified dividends in these two acts for two more years:

The tax on dividends is similar to the long term capital gains tax rate.

Updated 2013 Dividend Tax Rates

Here are the dividend income tax rates for 2013:

Tax Bracket Dividend Tax Rate
10% 0%
15% 0%
25% 15%
28% 15%
33% 15%
35% 15%
39.6% 20%


Get your biggest tax refund, guaranteed. Plus FREE Expert Tax Advice. File your Federal tax return for FREE today with TurboTax!





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