Earning dividends is a great incentive for investing in certain companies or mutual
funds. Dividends are particularly useful for people who need to add to their retirement savings. 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.
What Are Dividends?
When a company or mutual fund earns profit, 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 other dividends you get. The major difference between the two types of dividends is the dividend tax rate you will pay. The federal government taxes nonqualified dividends according to the regular income tax rates. Qualified dividends are subject to the lower, capital gains rates.
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. (You can find the dividend tax rate for each in the next section.)
Naturally, there are some exceptions. For example, you do not need to pay taxes on dividends from the Alaska Permanent Fund or from veterans’ insurance policies. The IRS website has more details on what is considered a qualified dividend.
Dividend Tax Rate for 2018
The dividend tax rate that you pay on ordinary dividends is the same as your regular income tax rate. So if you are a single filer with $50,000 of total income, you will fall in the 22% tax bracket for 2018 (what you file in 2019). The dividend tax rate you will pay on ordinary dividends is 22%.
The federal income tax brackets range from 10% to 37% for the 2018 tax year after being 10% to 39.6% in 2017.
Qualified dividends, on the other hand, are taxed at the capital gains rates, which are lower. For the 2018 tax year, you will not need to pay any taxes on qualified dividends as long as you have $38,600 or less of ordinary income. If you have between $38,600 and $425,800 of ordinary income, then you will pay a tax rate of 15% on qualified dividends. The rate for $425,801 or more is 20%. You can see these rates broken out by income in the tables below.
2018 SINGLE FILER TAX BRACKETS Income Tax Bracket Tax Rate Capital Gains Rate $0 – $9,525 10% 0% $9,526 – $38,600 12% 0% $38,601 – $38,700 12% 15% $38,701 – $82,500 22% 15% $82,501 – $157,500 24% 15% $157,501 – $200,000 32% 15% $200,001 – $425,800 35% 15% $425,801 – $500,000 35% 20% $500,001+ 37% 20% 2018 JOINT FILER TAX BRACKETS Income Tax Bracket Tax Rate Capital Gains Rate $0 – $19,050 10% 0% $19,051 – $77,200 12% 0% $77,201 – $77,400 12% 15% $77,401 – $165,000 22% 15% $165,001 – $315,000 24% 15% $315,001 – $400,000 32% 15% $400,001 – $479,000 35% 15% $479,001 – $600,000 35% 20% $600,001+ 37% 20% How to Report Dividends on Your Tax Return
If you have dividend income, you will enter it directly on your 1040 or 1040A. Both forms ask for dividend income on Lines 9a (ordinary) and 9b (qualified). You cannot file with a 1040EZ if you have any income from dividends or capital gains.
The amounts that you put on your 1040 will come right from your 1099-DIV. If you received dividends throughout the year, each financial institution that paid you the dividends will send you a 1099-DIV.
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 or 1040A.
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 elect to 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 in a retirement account, dividends you earn in a retirement account are untaxed.
Dividends can 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 a matching service like SmartAdvisor 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) and a Roth IRA. A 401(k) plan takes pre-tax money, and you pay income tax when you withdraw funds. A Roth IRA takes post-tax money, so you don’t have to pay income again when you withdraw the funds. Here’s a breakdown of 401(k) plans vs. IRAs to help you make the best choice for you.
Dividends are a great way to earn extra income. They are especially useful in retirement because they provide a source of regular and 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
- Retirement is unique because you have a finite amount of savings, and you need to make it last. Things like creating a retirement budget or downsizing your home will allow you to make your money last. Here are 11 steps to make you retirement savings last.
- If you don’t know how to get started with retirement savings, consider talking to financial advisor. A financial advisor will be able to look at your individual financial situation and create a realistic plan. Take our financial advisor matching quiz and we’ll do the rest by pairing you with an advisor.
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