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
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.
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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Introduction
As an expert and enthusiast, I have access to a wide range of information on various topics, including taxation and dividends. I can provide you with accurate and up-to-date information based on reliable sources. Let's dive into the concepts mentioned in the article you provided.
Taxation of Dividend Income
In most cases, dividend income is taxable. Taxpayers often receive a Form 1099-DIV for dividends exceeding $10 earned from any single entity. Additionally, taxpayers must report this income on Schedule B of their Federal tax return if they've received over $1,500.
Qualified Dividends
Qualified dividends are subject to their own tax table, which topped out at 20% for 2022. Qualified dividends include those paid by U.S. companies, companies in U.S. possession, foreign companies residing in countries eligible for benefits under a U.S. tax treaty, and foreign companies' stocks that can be easily traded on major U.S. stock markets.
To be eligible for the special tax rate, qualified dividends must meet holding period requirements. The stock must have been held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. For preferred stock, the holding period requirement is more than 90 days during the 181-day period beginning 90 days before the ex-dividend date if the dividends are due in a period longer than 366 days.
Nonqualified Dividends
Nonqualified dividends, also known as ordinary dividends, do not meet the qualified dividend requirements and are treated as short-term capital gains. These dividends are taxed at the same rates as an individual's regular income.
Tax Rates for Dividends
The tax rate for dividends depends on whether they are qualified or nonqualified. Qualified dividends, including those paid by U.S. companies, are taxed at the long-term capital gains rate. Nonqualified dividends, such as those paid by real estate investment trusts (REITs), are taxed at the regular income rate.
The tax rate for qualified dividends varies based on the taxpayer's filing status and taxable income. For 2022 and 2023, the tax rates for qualified dividends are as follows:
2022 Tax Rates for Qualified Dividends:
- Single:
- 0% tax rate for income between $0 and $41,675
- 15% tax rate for income between $41,676 and $459,750
- 20% tax rate for income above $459,751
- Married Filing Jointly:
- 0% tax rate for income between $0 and $83,350
- 15% tax rate for income between $83,351 and $517,200
- 20% tax rate for income above $517,201
- Married Filing Separately:
- 0% tax rate for income between $0 and $41,675
- 15% tax rate for income between $41,676 and $258,600
- 20% tax rate for income above $258,601
- Head of Household:
- 0% tax rate for income between $0 and $55,800
- 15% tax rate for income between $55,801 and $488,500
- 20% tax rate for income above $488,501 2023 Tax Rates for Qualified Dividends:
- Single:
- 0% tax rate for income between $0 and $44,625
- 15% tax rate for income between $44,626 and $492,300
- 20% tax rate for income above $492,301
- Married Filing Jointly:
- 0% tax rate for income between $0 and $89,250
- 15% tax rate for income between $89,251 and $553,850
- 20% tax rate for income above $553,851
- Married Filing Separately:
- 0% tax rate for income between $0 and $44,625
- 15% tax rate for income between $44,626 and $276,900
- 20% tax rate for income above $276,901
- Head of Household:
- 0% tax rate for income between $0 and $59,750
- 15% tax rate for income between $59,751 and $523,050
- 20% tax rate for income above $523,051
Avoiding Taxes on Dividends
There are several strategies taxpayers can employ to potentially avoid or minimize taxes on dividends:
- Stay in lower tax brackets: Taxpayers can aim to keep their taxable income within lower tax brackets to reduce the tax rate applied to their dividends.
- Invest in tax-exempt bonds: Some types of investments, such as tax-exempt bonds, offer tax-exempt dividends.
- Utilize tax-advantaged accounts: Taxpayers can leverage tax-exempt accounts (e.g., 401(k) or IRA) or tax-deferred accounts to defer taxes on dividends until retirement or avoid taxes altogether if certain conditions are met.
Taxation of Reinvested Dividends
The taxation of reinvested dividends depends on the type of account and the nature of the dividends. Certain tax-advantaged accounts, such as a 401(k) or IRA, are not taxable unless nonqualifying distributions are taken or taxable funds are distributed at retirement. However, if dividends are claimed as ordinary income and then reinvested, they must still be reported as dividend income. The dividends earned are valued at their fair market value at the time of the award.
I hope this information clarifies the concepts mentioned in the article you provided. If you have any further questions, feel free to ask!
