Dividends and Taxes

As many await the release of various 1099s to report dividend income before filing their taxes, myself included, now seems like a good idea to discuss the various tax implications surrounding dividends. Dividends may be taxed depending on various factors including the type of dividend, income, and what kind of account that investment is located in.

Type of Dividend

There are two different types of dividends, Qualified and Ordinary. Qualified dividends are those that are reported to the IRS as capital gain rather than as income. For most Americans, this results in a 15% tax on those gains.

Ordinary dividends factor into your ordinary income, meaning that these dividends will be taxed at the same tax rate. This could be as high as 37% for the highest earners.

Income requirements

For Qualified Dividends, if you make up to $41,675 as a single taxpayer or up to $83,350 as a married taxpayer filing jointly your capital gains tax rate would be 0%. The majority of taxpayers will fall between the 15% capital gains rate making between $41,676 to $459,750 for single taxpayers and $83,351 to $517,200 for married taxpayers filing jointly. The highest capital gains tax rate is 20% and that is for those making over $459,751 for single taxpayers and $517,201 for married taxpayers filing jointly.

Ordinary dividends, as mentioned above, will be taxed at your normal tax rate. This ranges from 10% to 37% for the highest earners.

Type of Account

Regular brokerage accounts, 401(k), 529-Plans (college savings plans), traditional IRAs, and Roth IRAs, and the list goes on. Different types mean different taxation rules. Regular brokerage accounts for example generally will require one to pay taxes on dividends received. Dividends received inside a retirement account such as a 401(k), Traditional IRA, or Roth IRA will not be taxable as those are generally deferred until withdrawal. With the exception of a Roth IRA which is a post-tax investment.

For more information on dividends or assistance with various 1099s, please reach out to the Professionals at The Center for Financial, Legal, & Tax Planning Inc., at (618) 997-3436

***The information listed above is for general informational purposes only. It is not to be considered Financial, Legal, or Tax Planning advice. Please consult with a Professional if you require assistance with any of the information above***