Q: Are S&P 500 dividends taxable?
A: Owning the market - by buying the Standard & Poor’s 500 - is a great way to keep costs and taxes low. But Uncle Sam usually still gets a piece.
There’s no shortage of mutual funds and exchange-traded funds that own all the stocks in the S&P 500. Such investments have infamously low annual expense ratios. These S&P 500 funds have another benefit people appreciate more in April, and that’s their tax efficiency. These funds buy or sell very few shares each year, so most generate very little in terms of taxable capital gains, if any. But there are usually taxes due on S&P 500 funds’ dividends. The exact amount of taxes varies by taxpayer, though. For most taxpayers, in the 25% or higher tax bracket, qualified dividends are taxed at 15%. The S&P 500 is currently yielding about 2%, which generates a taxable event for most. If you have $1,000 invested in the S&P 500, you would receive $20 in dividends which would be taxable. However, if you’re in the 10% or 15% tax bracket your tax rate on qualified dividends would be 0%. Remember that the exact tax you pay is tied to your tax rate and income. Also, most S&P 500 dividends are qualified for the lower dividend tax rate, but some might vary. Your brokerage tax form will give details.
USA TODAY markets reporter Matt Krantz answers a different reader question every weekday. To submit a question, e-mail Matt at mkrantz@usatoday.com or on Twitter @mattkrantz.
