Will Qualified Dividends Continue to Be Charged as Long Term Holdings
Dividends aren't free money — they're usually taxable income. But how and when you own an investment that pays them can dramatically change the dividend tax rate you pay. There are many exceptions and unusual scenarios with special rules — see IRS Publication 550 for the details — but here's generally how dividend tax works.
What is the dividend tax rate?
The tax rate on qualified dividends is 0%, 15% or 20%, depending on your taxable income and filing status. The tax rate on nonqualified dividends is the same as your regular income tax bracket. In both cases, people in higher tax brackets pay a higher dividend tax rate.
What is the dividend tax rate for the 2021 tax year?
| Tax-filing status | Single | Married, filing jointly | Married, filing separately | Head of household |
|---|---|---|---|---|
| 0% | $0 to $40,400 | $0 to $80,800 | $0 to $40,400 | $0 to $54,100 |
| 15% | $40,401 to $445,850 | $80,801 to $501,600 | $40,401 to $250,800 | $54,101 to $473,750 |
| 20% | $445,851 or more | $501,601 or more | $250,801 or more | $473,751 or more |
What is the dividend tax rate for the 2022 tax year?
| Tax-filing status | Single | Married, filing jointly | Married, filing separately | Head of household |
|---|---|---|---|---|
| 0% | $0 to $41,675 | $0 to $83,350 | $0 to $41,675 | $0 to $55,800 |
| 15% | $41,676 to $459,750 | $83,351 to $517,200 | $41,676 to $258,600 | $55,801 to $488,500 |
| 20% | $459,751 or more | $517,201 or more | $258,601 or more | $488,501 or more |
What are qualified dividends and nonqualified dividends?
Qualified dividends come with the tax advantage of a lower tax rate. Three things usually determine whether a dividend is qualified:
1. It is paid by a U.S. corporation or qualifying foreign entity. For many investors — be they in stocks, mutual funds or ETFs — this one's easy to satisfy.
2. It is actually a dividend in the eyes of the IRS. Some things don't count as dividends, despite what they might be called, including:
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Premiums an insurance company kicks back.
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Annual distributions credit unions make to members.
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"Dividends" from co-ops or tax-exempt organizations.
3. You held the underlying security for long enough. The definition of "enough" gets a little tricky, but typically, if you owned the security for more than 60 days during the 121-day period that began 60 days before the ex-dividend date — that is, the day by when you must own the stock to receive the dividend — the dividend is usually qualified. (Preferred stock has special rules, by the way.)
Here's an example. If your Ford shares paid a dividend on Sept. 1 and the ex-dividend date was July 20, you would need to have owned your shares for at least 61 days between May 21 and Sept. 19. And when you count the days, include the day you sold the shares but not the day you bought them.
If you don't hold the shares long enough, the IRS might deem them nonqualified, and you'll pay tax at the higher, nonqualified rate. Again, remember that there are many exceptions and unusual scenarios with special rules — see IRS Publication 550 for the details.
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How to report dividend income on your taxes
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After the end of the year, you'll receive a Form 1099-DIV — or sometimes a Schedule K-1 — from your broker or any entity that sent you at least $10 in dividends and other distributions. The 1099-DIV indicates what you were paid and whether the dividends were qualified or nonqualified.
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You use this information to fill out your tax return. You might also need to fill out a Schedule B if you received more than $1,500 in dividends for the year.
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Even if you didn't receive a dividend in cash — let's say you automatically reinvested yours to buy more shares of the underlying stock, such as in a dividend reinvestment plan (DRIP) — you still need to report it.
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You also need to report dividends from investments you sold during the year.
How to control your dividend tax bill
Pros say a few maneuvers can help.
Watch the calendar
You could pay a lower dividend tax rate by holding your investments for the 61-day minimum. Just be sure that doing so aligns with your other investment objectives.
Set cash aside
Your employer withholds taxes from your paycheck and sends them to the IRS on your behalf — but there's usually nobody doing the same with your dividends. You may need to pay estimated taxes throughout the year. Your tax software or a qualified tax pro can help calculate how much that is and when to pay.
Consider using a retirement account
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Owning dividend-paying investments inside one could shelter dividends from taxes or defer taxes on them. Think ahead, though. Do you need the income now?
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Also, the type of retirement account matters when it comes to determining the tax bill. When you eventually withdraw money from a traditional IRA , for example, it may be taxed at your ordinary income tax rate rather than at those lower qualified dividend tax rates. If you qualify for a Roth IRA , you won't receive a tax break on the contribution, but your eventual withdrawals — after age 59 ½ — may be tax-free. ( Not sure what the difference is between Roth and traditional IRAs? We explain here. )
See more ways to save and invest for the future
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Source: https://www.nerdwallet.com/article/taxes/dividend-tax-rate
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