Understanding ETF Dividends & Tax Implications

ETF dividends are part of what make ETFs such a unique investment tool. Mutual funds only reinvest the money back into the fund for their clients. However, ETFs actually pay out the individual dividends from the stocks that make up the ETF. This can provide a handy little residual income, but it can also be confusing when it comes time to pay taxes. Here are a few things to consider about paying your ETF dividend taxes. 

Qualified vs Unqualified

There are two types of dividends that can be distributed with ETFs: qualified and unqualified dividends. In order to fall into the qualified category you must be the owner of the ETF share for at least 60 days out of the quarter. That particular security must also not be on the unqualified dividend list. The company that issues the dividend must be a United States company or qualified foreign corporation. 

Tax Brackets

Depending on what personal tax bracket you occupy, your dividend taxes will fall into different categories. The tax rate that you will pay is somewhere between 5% and 15%. The more money that you make overall, the higher your dividend tax bracket is going to be. 

When it comes time to pay taxes, you need to have detailed records of all of the ETF dividends that you have received.