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dividend tax rate

Earning dividends is a great incentive for investing in certain companies or mutual funds. Dividends are particularly useful for people who need to supplement their retirement income. However, you will need to pay tax on any dividends you receive. Your dividend tax rate will depend on what type of dividends you have, how much you made from those dividends and how much other income you have. It can also be helpful to consult with a financial advisor to learn more about dividends and dividend taxes.

Dividends Defined

When a company or mutual fund earns profits, it will sometimes share those profits with its shareholders. The payments it makes to shareholders (typically each quarter) are dividends. Most companies pay dividends as cash, but it’s possible to get them as stock, stock rights or property.

There are two types of dividends: qualified and nonqualified. A dividend is typically qualified if you have held the underlying stock for a certain period of time. According to the IRS, a dividend is qualified if you have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.

Companies use ex-dividend dates to determine if a shareholder has held stocks long enough to be entitled to receive the next dividend payment. You can learn more about ex-dividend dates in our guide to dividend investing.

Nonqualified dividends, which we sometimes call ordinary dividends, include a wide range of other dividends you may receive, including dividends on employee stock options and real estate investment trusts. The major difference between the two types of dividends is the dividend tax rate you will pay.

Do You Need to Pay Tax on Dividends?

In short, yes. The IRS considers dividends to be income, so you usually need to pay tax on them. Even if you reinvest all of your dividends directly back into the same company or fund that paid you the dividends, you will pay taxes. The exact dividend tax rate depends on what kind of dividends you have – ordinary or qualified.

The federal government taxes ordinary dividends according to the regular income tax rates. Qualified dividends are subject to the lower, capital gains rates. (You can find the dividend tax rate for each in the next section.)

Naturally, there are some exceptions. The IRS website has more details on what is considered a qualified dividend.

Dividend Tax Rate for Tax Year 2020

The dividend tax rates that you pay on ordinary dividends are the same as the regular federal income tax rates, which remain unchanged from 2019 to 2020. However, the income thresholds for each bracket increased slightly in 2020 to account for inflation. For the 2020 tax year, which is what you file in 2021, the federal income tax rates range from 10% to 37% (down slightly after being 10% to 39.6% in 2017).

So if you are a single filer with $50,000 of total income, you will fall in the 22% tax bracket for tax year 2020. The dividend tax rate you will pay on ordinary dividends is 22%.

Qualified dividends, on the other hand, are taxed at the capital gains rates, which are lower. Similarly, for the 2020 tax year, the capital gains rate, is the same as 2018 but the brackets changed slightly due to inflation.

The dividend tax rates for tax year 2020 are as follows.

Income Tax Bracket Income Tax Rate Capital Gains Rate
$0 – $9,875 10% 0%
$9,876 – $40,000 12% 0%
$40,001 – $40,125 12% 15%
$40,126 – $85,525 22% 15%
$85,526 – $163,300 24% 15%
$163,301 – $207,350 32% 15%
$207,351 – $441,450 35% 15%
$441,451 – $518,400 35% 20%
$518,401+ 37% 20%
Income Tax Bracket Income Tax Rate Capital Gains Rate
$0 – $19,750 10% 0%
$19,751 – $80,000 12% 0%
$80,001 – $80,250 12% 15%
$80,251 – $171,050 22% 15%
$171,051 – $326,600 24% 15%
$326,601 – $414,700 32% 15%
$414,701- $496,600 35% 15%
$496,601 – $622,050 35% 20%
$622,051+ 37% 20%

Dividend Tax Rate for Tax Year 2021

dividend tax rate

The tax rates for ordinary dividends are the same as the federal income tax rates, and these rates remain unchanged from 2020 to 2021. However, the income thresholds for each bracket will be adjusted for tax year 2021 to account for inflation. Similarly, capital gains taxes, which you pay for qualified dividends, are at the same rates as 2018 but with income brackets changed slightly due to inflation.

For the 2021 tax year (which you’ll file in early 2022) the dividend tax rates are as follows.

Income Tax Bracket Income Tax Rate Capital Gains Rate
$0 – $9,950 10% 0%
$9,951 – $40,400 12% 0%
$40,401 – $40,525 12% 15%
$40,526 – $86,375 22% 15%
$86,376 – $164,925 24% 15%
$164,926 – $209,425 32% 15%
$209,426 – $445,850 35% 15%
$445,851 – $523,600 35% 20%
$523,601+ 37% 20%
Income Tax Bracket Income Tax Rate Capital Gains Rate
$0 – $19,900 10% 0%
$19,901 – $80,800 12% 0%
$80,801 – $81,050 12% 15%
$81,051 – $172,750 22% 15%
$172,751 – $329,850 24% 15%
$329,851 – $418,850 32% 15%
$418,851 – $501,600 35% 15%
$501,601 – $628,300 35% 20%
$628,301+ 37% 20%

How to Report Dividends on Your Tax Return

If you have dividend income, you will enter it directly on your 1040. The forms asks for dividend income on lines 3a (qualified) and 3b (ordinary).

The amounts that you put on your 1040 will come right from your 1099-DIV. If you received dividends throughout the year, the brokerages and other financial institutions through which you received dividends will send you 1099-DIV forms.

You may not receive a 1099-DIV if you had less than $10 in dividends. If that’s the case, you should still report that income on your tax form. If you have more than $1,500 in ordinary dividends, you will need to report those on Schedule B. Then you will attach Schedule B to your 1040.

Some people will also receive a Schedule K-1. This form is for people who receive dividends (or other income) from a trust, estate, partnership, LLC or S corporation. It’s also possible you get a Schedule K-1 if you invest in a fund or exchange-traded fund (ETF) that operates as a partnership. However, even if you get a Schedule K-1, you will get a 1099-DIV reporting the dividends you received.

The IRS requires all financial institutions to send these forms to recipients by Jan. 31. It is possible that your forms won’t be available electronically until a day or two later. It may also take a few weeks to receive your form if you get it through the mail.

Line 1a of the 1099-DIV will list the amount of ordinary dividends you have and line 1b will list your qualified dividends.

Are Dividends Worth It?

Dividends are particularly popular in retirement accounts and with retirees. Because you do not have to pay tax on income that is still held in a retirement account, dividends you earn in a retirement account are untaxed. That means you can reinvest those dividends to further grow your savings, without the government taxing them first.

Dividends can also provide a steady source of income in retirement. However, don’t forget that dividends are not a guarantee. A company or fund could stop paying dividends and even an established company has the potential to go under.

If you are unsure what tax implications dividends will have for you, the best thing to do is talk to a financial advisor. A financial advisor will be able to look at how an investing decision will impact you while also considering your overall financial picture. We recommend using our free financial advisor matching service to help you find advisors who meet your specific criteria.

Avoid Dividend Taxes with a Retirement Account

The biggest way to avoid taxes on dividends is to put dividend-earning stocks in a retirement account. The benefit of retirement accounts is that your money grows tax-free. You will still need to pay taxes either before or after you contribute the money, but you will not have to pay tax as your savings grow within the account.

What kind of retirement account you use will depend on your personal needs. Two common options are a 401(k) plan and a Roth IRA. A 401(k) is sponsored by your employer and takes pre-tax money; you pay income tax when you withdraw funds. A Roth IRA takes post-tax money; you don’t get to deduct the money you put in, but once it’s in, your money grows tax-free and then can be withdrawn as tax-free income. Here’s a breakdown of 401(k) plans vs. IRAs to help you make the best choice for you.

The Takeaway

dividend tax rate

Dividends are a great way to earn extra income. They are especially useful in retirement because they provide a source of regular and (somewhat) predictable income. However, you will need to pay taxes on any dividends you make. The exact dividend tax rate you pay will depend on what kind of dividends you have. Nonqualified dividends (also called ordinary dividends) are taxed at the regular federal income tax rate. Qualified dividends get the benefit of lower dividend tax rates because the IRS taxes them as capital gains.

If you’re trying to avoid tax on dividends completely, consider putting your dividend-earning shares in a retirement account. For example, dividends in a 401(k) or Roth IRA will grow tax-free.

Tips for Building Retirement Savings

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Derek Silva, CEPF® Derek Silva is determined to make personal finance accessible to everyone. He writes on a variety of personal finance topics for SmartAsset, serving as a retirement and credit card expert. Derek is a member of the Society for Advancing Business Editing and Writing and a Certified Educator in Personal Finance® (CEPF®). He has a degree from the University of Massachusetts Amherst and has spent time as an English language teacher in the Portuguese autonomous region of the Azores. The message Derek hopes people take away from his writing is, “Don’t forget that money is just a tool to help you reach your goals and live the lifestyle you want.”
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