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I am finally having a chance to do some additional investing. We are both retired, so living off of our social security and stock portfolio. Just wondering if there is any difference between income tax on collecting dividends vs. just selling stock.

All other things being equal... Am I taxed the same if I sell $10,000 worth of stock shares once a year, or if I collect dividends of $10,000 in a given year? Thanks for your thoughts.

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Am I taxed the same if I sell $10,000 worth of stock shares once a year, or if I collect dividends of $10,000 in a given year?

I'm no expert, but, probably not. Firstly, If you sell $10,000 worth of stock, you probably have a non-zero cost basis on the stock, so you would only pay tax on your capital gain. Depending on what you sell, you might even have a capital loss and pay no tax. And there are differences in tax rates for capital gains, ordinary income and dividend income (qualified vs. non-qualified) and different tax brackets depending on how high your income is. There are a lot of things to consider.
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The dividends paid by most common stocks are qualified and are taxed at capital gains rates.
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All other things being equal... Am I taxed the same if I sell $10,000 worth of stock shares once a year, or if I collect dividends of $10,000 in a given year? Thanks for your thoughts.

No, the tax liability will likely not be the same. There are differences, even within the categories of 'selling stock' vs. 'collecting dividends'. Not all stock sales and not all dividends are treated the same from a tax perspective, so you can't just compare 'selling stock' to 'collecting dividends' - you have to look at the circumstances for each.

First of all, unless your cost basis in a stock is $0, not all $10k of the stock sale will be taxed - only the gain is taxed. So selling stock to get $10k in proceeds may only result in taxes on, say, a $5k gain - or if it's a loss, the loss may actually help you save on taxes by offsetting other capital gains and possibly even up to $3k in ordinary income. Then, you need to look at how long you held the stock - if the shares you sold were held long term, then the taxes will be at the capital gains rates, which are mostly lower than ordinary income rates. If the shares you sold had been held for 1 year or less, then the gain will be taxed at ordinary income rates.

Taxation of dividends is trickier, because there are different categories of dividends:
- Ordinary dividends - taxed at ordinary income rates
- Qualified dividends - taxed at capital gains rates, if you meet holding requirements
- Non-dividend payment (formerly known as Return of Capital) - is not generally taxed, but does reduce your basis in the stock. Once you exhaust your basis in the stock, then non-dividend payments are taxed at long term capital gains rates

And of course, that doesn't account for things like 1250a dividends, if you've let your dividend paying stocks be borrowed by short sellers, or wash sales of stocks, which can all impact the taxes.

AJ
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The dividends paid by most common stocks are qualified and are taxed at capital gains rates.

You forgot to qualify that statement with: if you meet the holding time requirement.

And you don't seem to be considering the fact that unless there is a $0 basis in the stock, not all of a stock sale will be taxed, while the entire amount of qualified dividends will be taxed. So even if the rate is the same, the tax liability likely won't be the same.

AJ
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I would pay more attention to what trimming stocks does to your stash versus what dividends do to it.

If my growth stock made 25% in a year I am going to have a bigger stash to draw from than if I invest in dividend stocks that yield 7% yearly.

Then there is the how much safety funds do you have for emergency's or recessions?

[insert fail stories and advice here]

MoSlo
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Thank you all for the info. It has given me s starting point for more research. I knew I was posting a simplified question, and needed a more in depth direction to go. Thanks!

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