Dividend Tax Rates: What You Need To Know for 2023
The dividend tax rate is the amount of tax you pay on dividends from your investments. Many stocks, mutual funds and ETFs pay dividends to investors. Dividends are the share of a company’s profits that are paid back to shareholders.
Read: 3 Ways Smart People Save Money When Filing Their Taxes
With the tax filing deadline coming, you might be wondering about the taxes you will have to pay on your dividends. As with many aspects of personal federal income taxes, the answer depends on several factors.
What Is the Dividend Tax Rate?
The dividend tax rate for 2022 is either 0%, 15% or 20%. The rate you’ll pay depends upon:
- Your filing status — single; married, filing jointly; married, filing separately; or head of household
- Your taxable income for 2022
When tax professionals and finance experts refer to taxable dividends, they typically mean qualified dividends. Ordinary, or nonqualified dividends, are taxed as ordinary income.
Understanding Qualified vs. Nonqualified Dividends
Qualified dividends are taxed at a different rate than your regular, earned income or income from interest payments. You can identify a qualified dividend because it is paid by a U.S. corporation or a qualifying foreign entity, which is listed on a major U.S. stock exchange, such as FOREX. Dividends from stocks, ETFs and mutual funds are classified as qualified.
Additionally, to be classified as a qualified dividend, you must have held the investment for a certain amount of time prior to receiving the dividend. You must have owned the dividend-paying stock, mutual fund or ETF for more than 60 days of a specific 121-day period. This period begins 60 days before the ex-dividend date. The ex-dividend date is the day you must own the security in order to collect the dividends for that month or quarter.
It’s important to note that your dividends are taxable even if you roll the money back into the investment. If you use a Dividend Reinvestment Plan (DRIP) to purchase additional shares or fractionals of the stock, mutual fund or ETF, you will still be taxed on this investment income.
You should receive a Form 1099-DIV, Dividends and Distributions from any organization or company that pays you dividends of more than $10 for the year.
If you are unsure how to claim your dividends as income, you may want to consult with a tax professional.
How Much Tax Do You Pay on Dividends?
When you are calculating how much tax you pay on dividends, your rate will depend on your overall income and filing status. Here is a breakdown of the tax rates for this year.
Filing Single
- Taxable income of $41,675 or less: 0%
- Taxable income of $41,676 to $459,750: 15%
- Taxable income of $459,751 or more: 20%
Married and Filing Jointly
- Taxable income of $83,350 or less: 0%
- Taxable income of $83,351 to $517,200: 15%
- Taxable income of $517,201 or more: 20%
Married and Filing Separately
- Taxable income of $41,675 or less: 0%
- Taxable income of $41,676 to $258,600: 15%
- Taxable income of $258,601 or more: 20%
Head of Household
- Taxable income of $55,800 or less: 0%
- Taxable income of $55,801 to $488,500: 15%
- Taxable income of $488,501 or more: 20%
Additionally, if you file as a single taxpayer or head of household and earn more than $200,000 in modified adjusted gross income, your dividends and other investment income are subject to an additional 3.8% Net Investment Income Tax. If you are married and filing jointly, you will pay NIIT if your modified adjusted gross income exceeds $250,000. Married couples, filing separately will have to pay NIIT if their individual income exceeds $125,000.
Dividends That Are Not Taxed
Some dividends are not taxed. These include dividends that come from a tax-deferred or tax-free account, including:
- Roth IRA
- 401(k)
- College savings plan
Additionally, dividends or payouts from a real estate investment trust (REIT) are taxed as ordinary income, and not at the lower dividend tax rate.
Dividends That Are Actually Interest
Some money you receive from organizations like credit unions or co-op boards may actually be classified as “interest,” rather than dividends, and are taxed accordingly. Although the organization paying the distributions may call them dividends, you will receive a Form 1099-INT. These distributions are taxed as ordinary income, and not at the lower rate.
Some examples of interest payments include:
- Distributions from co-op organizations.
- Distributions — often called dividends — paid by credit unions to their members.
- Money distributed from prepaid insurance premiums.
Are Dividends Taxed as Capital Gains?
Dividends are taxed at the same rate as long-term capital gains, which is lower than your regular income tax rate. The main difference between dividends and other capital gains is that you will receive a 1099-DIV form for dividend income.
How Can I Avoid Paying Taxes on Dividends?
As the saying goes, the only certainties in life are death and taxes. With this in mind, you can’t avoid paying tax on dividends if they represent actual profit to you. But you can offset the gains with losses.
With careful planning prior to the end of the tax year, you can use a process called “tax loss harvesting” to offset your capital gains with up to $3,000 in losses. By selling stocks at a loss before the end of the year, you can write off up to $3,000 in losses to offset your capital gains from stock sales or dividends.
Keep in mind that you can also write off fees and expenses related to your investments to reduce your tax liability.
How To Prepare for Tax Day 2023
With Tax Day rapidly approaching, you will want to gather all your paperwork, including your 1099-DIV that shows your dividend income. You will report capital gains and dividend income — and losses — on Form 1040. If you claim more than $1,500 in taxable dividends, you will also have to file Schedule B (Form 1040).
If you have any questions, you should make an appointment with a tax professional who can help you maximize your deductions to minimize your tax liability.
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