In most cases, dividend income is taxable. Taxpayers will often receive a Form 1099-DIV for all dividends in excess of $10 or more earned from any single entity. In addition, taxpayers must report this income on Schedule B of their Federal tax return if they've received over $1,500. Qualified dividends are also subject to their own tax table which topped out at 20% for 2022.
Some investment vehicles that issue dividends are exempt from taxes, as some mutual funds or other regulated investments may hold municipal or tax-exempt securities that yield nontaxable dividends. In addition, the lowest tier for the qualified dividend tax table assesses a 0% tax on individuals with lower income.
Key Takeaways
- The tax rate for dividends depends on whether they are qualified or nonqualified.
- Qualified dividends, which include those paid by U.S. companies, are taxed the long-term capital gains rate.
- Nonqualified, or ordinary, dividends, such as those paid by real estate investment trusts (REITs), are taxed at the regular income rate.
- Taxpayers will receive a Form 1099-DIV for dividends above $10. This form is also sent to the IRS on the taxpayer's behalf.
- Taxpayers may need to complete Schedule B to support Form 1040 if they earn a certain amount of dividends.
A qualified dividend is taxed at the lower long-term capital gains tax rate instead of at the higher tax rate used on an individual’s regular income. To be eligible for this special tax rate, a dividend must be paid by one of the following:
- A U.S. company
- A company in U.S. possession
- A foreign company residing in a country that is eligible for benefits under a U.S. tax treaty
- A foreign company’s stock that can be easily traded on a major U.S. stock market
These dividends must also meet holding period requirements. The stock must have been held in excess of 60 days during the 121-day period beginning 60 days before the ex-dividend date. In the case of preferred stock, the stock must have been held in excess of 90 days during the 181-day period beginning 90 days before the ex-dividend date if the dividends are due in a period of time longer than 366 days.
Note that if a taxpayer's taxable income is low enough, qualified dividend income is assessed a marginal tax rate of 0%.
Qualified Dividend Taxes
The amount of tax paid on qualified dividends depends on the taxpayer's filing status and taxable income. Below certain threshold, qualified dividend income is tax-free, and qualified dividend income is assessed at the highest 20% rate to those who exceed the highest income thresholds below.
The breakdown of taxes on qualified dividends for 2022 and 2023 is below. The figures are calculated using the Qualified Dividends and Capital Gain Tax Worksheet contained within the instructions for Form 1040 in addition to inflation-adjusted wage brackets for 2023.
| Dividend Tax Rate, 2022 | |||
|---|---|---|---|
| Filing Status | 0% Tax Rate | 15% Tax Rate | 20% Tax Rate |
| Single | $0 to $41,675 | $41,676 to $459,750 | $459,751 or more |
| Married Filing Jointly | $0 to $83,350 | $83,351 to $517,200 | $517,201 or more |
| Married Filing Separately | $0 to $41,675 | $41,676 to $258,600 | $258,601 or more |
| Head of Household | $0 to $55,800 | $55,801 to $488,500 | $488,501 or more |
| Dividend Tax Rate, 2023 | |||
|---|---|---|---|
| Filing Status | 0% Tax Rate | 15% Tax Rate | 20% Tax Rate |
| Single | $0 to $44,625 | $44,626 to $492,300 | $492,301 or more |
| Married Filing Jointly | $0 to $89,250 | $89,251 to $553,850 | $553,851 or more |
| Married Filing Separately | $0 to $44,625 | $44,626 to $276,900 | $276,901 or more |
| Head of Household | $0 to $59,750 | $59,751 to $523,050 | $523,051 or more |
Meanwhile, there are nonqualified, or ordinary, dividends. These dividends do not meet the qualified dividend requirements and are treated as short-term capital gains. These nonqualified dividends are taxed at the same rates as an individual's regular income. Thus, in the chart above, nonqualified dividends are taxed at the "Tax Rate on Regular Income."
How Much Do You Pay in Taxes for Dividends?
The ultimate tax rate a taxpayer pays on dividends depends on the taxpayer's taxable income (and associated marginal tax rate) in addition to the type of dividend received. Qualifying dividends are assessed their own rate up to a maximum rate of 20%, though some of these dividends may be taxed at a marginal rate as low as 0%.
How Do I Avoid Paying Taxes on Dividends?
There's several strategies taxpayers can employ to avoid paying taxes on dividends. Taxpayers would do well to stay in lower tax brackets (for tax reasons). In addition, there are many types of investments that offer tax-exempt bonds. Last, investors may leverage tax-exempt accounts or tax-deferred accounts to at least temporarily defer when taxes need to be paid.
Do I Get Taxed on Dividends If I Reinvest Them?
It depends. Certain types of tax-advantaged accounts such as a 401(k) or IRA are not taxable unless a nonqualifying distribution is taken or if taxable funds are distributed at retirement. Other types of dividends aren't taxed when they are earned. For example, many government-issued securities offer tax exemption status. If dividends are claimed as ordinary income, then reinvested, you must claim them as dividend income. The dividends earned are valued at their fair market value at the time of the award.
The Bottom Line
Many investors seek additional cash flow by investing in dividend-issuing securities. Some securities are tax-exempt, while other types of dividends held within certain retirement accounts is non-taxable. However, qualified dividends are taxed at a rate based on a taxpayer's marginal income rates. Qualified dividends can be taxed at a rate up to 20%, and a taxpayer may need to fill out additional tax schedules to support the income.
Article Sources
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Internal Revenue Service. "Instructions for Form 1099-DIV," Page 1.
Internal Revenue Service. "1040, Qualified Dividends."
Internal Revenue Service. "Topic No. 409 Capital Gains and Losses."
Internal Revenue Service. "Topic No. 404, Dividends."
Internal Revenue Service. "1040, Ordinary Dividends."
Internal Revenue Service. "Publication 550 (2022), Investment Income and Expenses."
Internal Revenue Service. "Topic No. 404, Dividends."
Internal Revenue Service. "Publication 550," Page 19.
Internal Revenue Service. "Form 1040, 2022 Instructions," Page 36.
Internal Revenue Service. "Rev. Proc. 2022-38."
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As a seasoned financial expert with in-depth knowledge of taxation on investment income, particularly dividends, I can provide valuable insights into the concepts discussed in the article.
The article primarily focuses on the taxation of dividend income and distinguishes between qualified and nonqualified dividends. I'll break down the key concepts addressed in the article:
-
Form 1099-DIV and Reporting on Schedule B:
- Taxpayers often receive a Form 1099-DIV for dividends exceeding $10 from a single entity.
- Dividends over $1,500 must be reported on Schedule B of the Federal tax return.
-
Qualified vs. Nonqualified Dividends:
- Qualified dividends, paid by U.S. companies or eligible foreign companies, are taxed at the long-term capital gains rate.
- Nonqualified dividends, like those from real estate investment trusts (REITs), are taxed at the regular income rate.
-
Tax Rates on Qualified Dividends:
- Qualified dividends have specific tax rates based on filing status and income.
- The tax rates include 0%, 15%, and 20%, depending on income thresholds for singles, married filing jointly, married filing separately, and heads of household.
-
Tax Rates for 2022 and 2023:
- The article provides detailed tax rate breakdowns for qualified dividends in both 2022 and 2023.
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Tax Strategies and Exempt Investments:
- Strategies to avoid paying taxes on dividends include staying in lower tax brackets and investing in tax-exempt bonds.
- Tax-advantaged accounts, such as 401(k) or IRA, may offer tax benefits.
-
Taxation on Reinvested Dividends:
- The tax treatment of reinvested dividends depends on the type of account and whether dividends are claimed as ordinary income.
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Sources and References:
- The article cites various IRS publications, including Form 1099-DIV instructions, Form 1040 instructions, and relevant IRS topics.
In conclusion, understanding the taxation nuances of dividend income is crucial for investors. Qualified dividends enjoy favorable tax rates, and investors can employ strategies and choose investments wisely to optimize their tax positions.
For more detailed or specific information, feel free to ask.
