Dividend income is usually taxable, but the rate at which it is taxed depends on whether its a qualified or nonqualified dividend. Qualified dividends are usually taxed at a lower rate than nonqualified dividends. You can calculate your dividend taxes using the information on your 1099-DIV.
How are dividends taxed (2022-2023) and why does it matter?
Table of Contents
What is the dividend tax rate?
When you become a stakeholder in a company, you receive a percentage of that companys profit. These distributions are called dividends. As a shareholder, you must pay taxes on these dividendsbut the tax rate on your dividends will depend on how those earnings are classified. Different types of dividends are taxed at different rates. The dividend tax rate ranges from 0% to 37%, depending on the kind of dividend and your tax bracket.
Optimize your savings by understanding dividend tax rates.
Public can help you save for the long term and optimize your tax liabilities.
Qualified and nonqualified dividends
In the United States, the IRS divides dividends into two categories: qualified and nonqualified (or ordinary) dividends. Qualified dividends must be issued by a major corporation that trades on an exchange like the Dow Jones or Nasdaq. A qualified dividend stock must be paid out by a publicly traded U.S. corporation, and the stock must be held for a minimum of 61 continuous days out of a 121-day holding period.
Not all dividends meet the requirements to be considered qualified. Some, such as those that are issued by an organization that is tax-exempt, cannot be considered qualified. Similarly, dividends issued by a foreign corporation or real estate investment trusts (REITs) cannot be considered qualified.
Any dividend that is not considered a qualified dividend is instead treated as an ordinary dividend. This includes most common or preferred stocks. Its important to note that theres no major difference between qualified and ordinary dividends besides their tax treatment.
But for tax purposes, investors face an advantage when they make money from qualified dividends: the qualified dividend tax rate is lower compared to the ordinary dividend tax rate.
Tax rates for qualified and ordinary dividends
For taxpayers, the split between qualified and ordinary dividends means there are two different possible tax rates on dividend income.
Ordinary dividends are taxed at the ordinary income tax rate. Taxpayers pay the same rate on these dividends as they do on most of their taxable income. The specific rate depends on the tax bracket and filing status of the individual investor. This means the tax rate on ordinary dividends varies between 10% and 37%.
Qualified dividends are taxed at the same rate as capital gains, which often results in a lower tax rate. Capital gains are taxed at 0%, 15% or 20% depending on filing status and your tax bracket. The only exception to these rates are high-income earners, who pay an additional 3.8% on their investment income, including qualified dividends.
If you have investments in several places, consolidating can help you figure out which dividends are qualified and which are ordinary. Public lets you transfer your stock portfolio without selling shares, optimizing taxes while streamlining your portfolio.
Dividend tax rates for 2022
From year to year, tax cuts and policy changes can alter what a given taxpayer owes in federal income tax. The same is true for long term capital gains taxand for qualified dividend taxes.
In the 2022 tax year, there are three brackets for qualified dividend taxes 0%, 15%, or 20%. The rate youll pay depends on your filing status and adjusted gross income. This means that a couple who are married filing jointly, making a combined $70,000 yearly, owe 0% on qualified dividendsessentially, their dividend payments are tax free. But a head of household earning the same amount owes 15% on those same dividend payments.
Want to know what your capital gains tax rate is? Check out Publics capital gains tax calculator.
Qualified Dividend Tax Rates 2022
However, nonqualified dividends are taxed at the normal federal income tax rate. There are seven brackets for income taxes, ranging from 10% to 37%. The same dividends would be taxed at the regular income rate, or 12% for a married couple filing together and 22% for head of household. If you want to know what tax bracket you fall into for 2022, check out the IRSs publication on tax brackets.
Dividend tax rates for 2023
The tax brackets for qualified dividends in the 2023 tax year differ somewhat from those used in the 2022 tax year. For instance, in the 2022 tax year, single filers making $450,000 would owe 15% in dividend taxes. However, to keep up with cost of living increases, the same taxpayer would owe 0% in dividend taxes for the 2023 tax year.
Qualified dividends are still taxed at the same three rates, though the brackets have changed.
Qualified Dividend Tax Rates 2023
The tax rates for ordinary dividends also fall into one of the same seven bands. However, like qualified dividends, the income ranges for these brackets have changed. Check out the IRSs publication on tax brackets for 2023.
To explore high yield dividend stocks, check out this article highlighting the top stocks offering impressive dividend yields.
Do I owe dividend taxes?
Even if you have investments in major U.S. corporations, you may not earn dividends on them in a given tax year. When you do earn a dividend on a given stock, assuming its in excess of $10, youll know because your brokerage will send you a Form 1099-DIV.
You must report dividends in excess of $1,500 on the Schedule B form of your tax return. After this, you’ll pay taxes on the qualified or ordinary dividends you have earned.
You can also offset your ordinary income, including dividend income, using tax-loss harvesting. You can offset your income by up to $3,000, which can be carried forward to future tax years.
Dividends in retirement accounts
When you earn dividends in retirement accounts, the nature of the account impacts the taxes youll owe on the dividends. When you withdraw from a traditional IRAwhether what youre withdrawing is earned as dividends or notyoull owe your regular tax rate on that money. When you withdraw dividends from a Roth IRA, as long as youre of retirement age, youll owe no taxes on your withdrawalbut you may owe your regular income tax rate on withdrawals prior to retirement age.
The bottom line
Dividend tax rates depend on the type of dividend youve received as well as your current tax bracket and filing status. Qualified dividends are taxed at the capital gains rate, which tends to be lower, while ordinary dividends are taxed at your normal federal income tax rate.
Dividends are one of the bonuses of long-term investments, but theyre taxable like any other form of income. Looking to invest for the long haul? Publics Long-Term Portfolio lets you lock in investments you care about so that you can invest for the future.
Optimize your savings by understanding dividend tax rates.
Public can help you save for the long term and optimize your tax liabilities.
Frequently asked questions
What income is taxable for dividends?
All dividends are taxable, though the rate depends on the type of dividend as well as your tax bracket and filing status. Dividends earned in tax-deferred accounts such as IRAs are not treated as taxable income, but you may be taxed when you make withdrawals from those accounts depending on your circumstances.
Are dividends taxed twice?
Dividends are taxed either at the capital gains rate or at your ordinary income tax rate.
Is the dividend tax rate always the same?
No, the dividend tax rate depends on whether your dividends are qualified or non-qualified.
How do I minimize paying tax on dividends?
Tax-loss harvesting can be used to offset gains from ordinary income, including dividends.