How to Navigate Dividend Taxes: A Comprehensive Guide

“`html

Understanding Qualified and Ordinary Dividends

Investing isn’t just about buying low and selling high. Many investments also pay dividends, providing periodic income that you can spend, save, or reinvest. However, dividends are considered taxable income, and the tax treatment varies depending on the type of dividend. Here’s what you need to know about qualified and ordinary dividends and how they impact your taxes.

What Are Qualified and Ordinary Dividends?

Dividends from stocks, mutual funds, and other investments can be paid monthly or quarterly, either in cash or shares. For tax purposes, dividends are categorized as either qualified or ordinary.

Qualified dividends typically come from most domestic companies and many qualified foreign companies listed on major U.S. exchanges. The IRS requires that you hold the shares for at least 61 days within the 121-day period surrounding the ex-dividend date to qualify.

Ordinary dividends may come from some foreign companies, real estate investment trusts, tax-exempt organizations, and other non-qualifying entities under IRS rules.

To determine the type of dividends you’ve received, check Form 1099-DIV or Schedule K, which will be sent to you if you’ve earned $10 or more in dividend income. These forms will indicate whether your dividends are qualified or ordinary, allowing you to report them correctly on your tax return.

How Are Qualified Dividends Taxed?

Qualified dividends are taxed at the long-term capital gains rate, which is generally lower than the regular income tax rate. The rate depends on your adjusted gross income and filing status. Here are the long-term capital gains tax rates for 2023:

• 0% for single filers earning up to $44,625, married filing jointly up to $89,250, married filing separately up to $44,625, and head of household up to $59,750.
• 15% for single filers earning $44,626 – $492,300, married filing jointly $89,251 – $553,850, married filing separately $44,626 – $276,900, and head of household $59,751 – $523,050.
• 20% for single filers earning over $492,300, married filing jointly over $553,850, married filing separately over $276,900, and head of household over $523,050.

For example, if you earn $100,000 a year and receive $10,000 in qualified dividends in 2023, you’ll be taxed $1,500.

How Are Ordinary Dividends Taxed?

Ordinary dividends are taxed at the same rate as short-term capital gains, which is your top personal tax rate. Here are the federal tax brackets for 2023:

• 10% for single filers earning $0 – $11,000, head of household $0 – $15,700, married filing separately $0 – $11,000, and married filing jointly $0 – $22,000.
• 12% for single filers earning $11,001 – $44,725, head of household $15,701 – $59,850, married filing separately $11,001 – $44,725, and married filing jointly $22,001 – $89,450.
• 22% for single filers earning $44,726 – $95,375, head of household $59,851 – $95,350, married filing separately $44,726 – $95,375, and married filing jointly $89,451 – $190,750.
• 24% for single filers earning $95,376 – $182,100, head of household $95,351 – $182,100, married filing separately $95,376 – $182,100, and married filing jointly $190,751 – $364,200.
• 32% for single filers earning $182,101 – $231,250, head of household $182,101 – $231,250, married filing separately $182,101 – $231,250, and married filing jointly $364,201 – $462,500.
• 35% for single filers earning $231,251 – $578,125, head of household $231,251 – $578,100, married filing separately $231,251 – $346,875, and married filing jointly $462,501 – $693,750.
• 37% for single filers earning $578,125 or more, head of household $578,101 or more, married filing separately $346,876 or more, and married filing jointly $693,751 or more.

Using the earlier example, if you earn $100,000 in regular income and $10,000 in ordinary dividends, your short-term capital gains tax rate would be 24% in 2023. You would owe $2,400 in taxes on $10,000 in dividends, which is 60% more than the tax on qualified dividends.

Additional Tax for High-Income Taxpayers

High-income taxpayers may face an additional 3.8% tax on net investment income if their modified adjusted gross income exceeds certain thresholds:

• $200,000 for single or head of household
• $250,000 for married filing jointly
• $125,000 for married filing separately

How to Minimize Your Dividend Taxes

While earning dividends usually means paying taxes, you can minimize your tax burden with these strategies:

• Choose qualified dividends: Opt for investments that pay qualified dividends, which are taxed at a lower rate.
• Use tax-advantaged accounts: Earnings on investments in a Roth IRA are tax-free, and similar benefits apply to 529 education accounts.
• Keep your regular income low: Keeping your adjusted gross income below certain thresholds can help you avoid additional taxes and potentially pay no taxes on dividends.

The Bottom Line

Reporting dividend income on your taxes is straightforward with the help of Form 1099-DIV. However, if you’re unsure about how your dividends are characterized or how they affect your taxes, consult your investment advisor or tax professional. They can help ensure your income is reported correctly and suggest strategies to minimize your tax liability.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you with all your mortgage needs!

“`