Earning dividends is a great incentive for investing in certain companies and mutual funds. Dividends are particularly useful for people who want to supplement their retirement income. However, like all income, you’ll need to pay taxes on any dividends you receive. Which dividend tax rates you pay depends on how long you’ve held your investments, the size of your dividends and how much other income you have. It can also be helpful to consult a financial advisor to learn more about taxes owed on dividends.
What Are Dividends?
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 non-qualified. 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.
Non-qualified dividends, which are sometimes called ordinary dividends, include a wide range of other dividends you may receive, including dividends on employee stock options and real estate investment trusts (REITs). The major difference between the two types of dividends is the tax rate you pay.
Dividends are particularly popular with retirees. Because you don’t have to pay taxes on income that’s in a retirement account, dividends you earn here 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 mutual fund could stop paying dividends, and even an established company has the potential to go under.
How Are Dividends Taxed?
Since the IRS considers dividends to be income, you usually need to pay taxes 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 as they technically still pass through your hands. The exact dividend tax rate depends on what kind of dividends you have: non-qualified or qualified.
The federal government taxes non-qualified dividends according to regular income tax rates and brackets. Qualified dividends are subject to the lower capital gains tax rates. Naturally, there are some exceptions though.
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. Try using our free financial advisor matching tool to find options in your area.
Qualified Dividend Tax Rates for 2023 and 2024
Qualified dividends, which are taxed at long-term capital gains rates, receive a more favorable tax treatment than non-qualified dividends. Here’s a look at the rates at which qualified dividends are taxed in 2023 and 2024.
2023 QualifiedDividend Tax Rates
| Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
| 0% | $0 – $44,625 | $0 – $89,250 | $0 – $44,625 | $0 – $59,750 |
| 15% | $44,625 – $492,300 | $89,250 – $553,850 | $44,625 – $276,900 | $59,750 – $523,050 |
| 20% | $492,300+ | $553,850+ | $276,900+ | $523,050+ |
To use the table above, all you need to know is your filing status and total income for the year. So let’s say you’re single and have $150,000 of annual income, with $10,000 of that being dividends. Your dividends would then be taxed at 15%, while the rest of your income would follow the federal income tax rates.
Now, for reference, let’s compare the qualified dividend tax rates for 2024, which you will file in 2025:
2024 Qualified Dividend Tax Rates
| Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
| 0% | $0 – $47,025 | $0 – $94,055 | $0 – $47,025 | $0 – $63,000 |
| 15% | $47,025 – $518,900 | $94,055 – $583,750 | $47,025 – $291,850 | $63,000 – $551,350 |
| 20% | $518,900+ | $583,750+ | $291,850+ | $$551,350+ |
As noted for 2023, the same principles apply to dividends earned in the 2024 tax year. Dividends that meet the qualified requirements are subject to much more beneficial tax rates than their non-qualified counterparts. Rates again vary from 0% up to 20%, though most taxpayers will likely fall in the middle 15% bracket.
Non-Qualified Dividend Tax Rates for 2023 and 2024
Thetax rates for non-qualified dividends are the same as federal ordinary income tax rates. Here are the income tax rates for 2023, which double as the rates for non-qualified dividends:
2023 Non-Qualified Dividend Tax Rates
| Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
| 10% | $0 – $11,000 | $0 – $22,000 | $0 – $11,000 | $0 – $15,700 |
| 12% | $11,000 – $44,725 | $22,000 – $89,450 | $11,000 – $44,725 | $15,700 – $59,850 |
| 22% | $44,725 – $95,375 | $89,450 – $190,750 | $44,725 – $95,375 | $59,850 – $95,350 |
| 24% | $95,375 – $182,100 | $190,750 – $364,200 | $95,375 – $182,100 | $95,350 – $182,100 |
| 32% | $182,100 – $231,250 | $364,200 – $462,500 | $182,100 – $231,250 | $182,100 – $231,250 |
| 35% | $231,250 – $578,125 | $462,500 – $693,750 | $231,250 – $346,875 | $231,250 – $578,100 |
| 37% | $578,125+ | $693,750+ | $346,875+ | $578,100+ |
Now, for another comparison, let’s take a look at the non-qualified dividend tax rates for 2024, which you will file taxes for in 2025:
2024 Non-Qualified Dividend Tax Rates
| Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
| 10% | $0 – $11,600 | $0 – $23,200 | $0 – $11,600 | $0 – $15,700 |
| 12% | $11,600 – $47,150 | $23,200 – $94,300 | $11,600 – $47,150 | $11,600 – $47,150 |
| 22% | $47,150 – $100,525 | $94,300 – $201,050 | $47,150 – $100,525 | $47,150 – $100,525 |
| 24% | $100,525 – $191,950 | $201,050 – $383,900 | $100,525 – $191,950 | $100,525 – $191,950 |
| 32% | $191,950 – $243,725 | $383,900 – $487,450 | $191,951 – $243,725 | $191,950 – $243,700 |
| 35% | $243,725 – $609,350 | $487,450 – $731,200 | $243,726 – $365,600 | $243,700 – $609,350 |
| 37% | $609,350+ | $731,200+ | $365,600+ | $609,350+ |
How to Report Dividends on Your Tax Return
If you have dividend income, you enter it directly on your Form 1040. The form asks for dividend income on lines 3a (qualified) and 3b (non-qualified). The amounts that you put on your 1040 will come right from your 1099-DIV. If you receive dividends throughout the year, the brokerages and other financial institutions through which you received them will send you 1099-DIV forms.
You may not receive a 1099-DIV if you have less than $10 in dividends. Even if that’s the case, you should still report that income on your tax form. If you have more than $1,500 in non-qualified 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) (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.
Avoid DividendTaxes With a Retirement Account
The best way to avoid taxes on dividends is to put dividend-earning stocks in a pre-tax retirement account. The benefit of retirement accounts is that your money grows tax-free until retirement. You 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 should use depends on your personal needs. Two common options are a 401(k) or Roth IRA. A 401(k) is sponsored by your employer and takes pre-tax money, and you pay income tax when you withdraw funds. A Roth IRA instead takes post-tax money, so you don’t get to deduct the money you put in, but once it’s there, it will grow tax-free. You can even withdraw it tax-free in retirement.
Bottom Line
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. Non-qualified 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.
Tips for Building Retirement Savings
- If you don’t know how to get started with retirement savings, consider talking to a financial advisor.SmartAsset’s free toolmatches you with up to three vetted financial advisorswho serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals,get started now.
- Retirement is unique because you have a finite amount of savings, and you need to make it last. Things like creating a retirement budgetor downsizing your home will allow you to make your money last. Here are a fewsteps to make your retirement savings last.
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As an enthusiast deeply immersed in the world of investments and financial planning, I bring a wealth of firsthand expertise to shed light on the complex yet crucial topic of dividend taxation. Having navigated the intricate landscape of dividends, tax implications, and investment strategies, I aim to provide a comprehensive understanding of the concepts discussed in the article you provided.
Understanding Dividends: Dividends serve as a lucrative incentive for investing in companies and mutual funds. When a company or mutual fund earns profits, it may distribute a portion of those profits to shareholders as dividends. These payments, typically made quarterly, can be in the form of cash, stock, stock rights, or property.
There are two main types of dividends: qualified and non-qualified. The classification depends on the duration the investor has held the underlying stock. According to IRS guidelines, a dividend is "qualified" if the stock has been held for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
Taxation of Dividends: Dividends are considered income and are subject to taxation. The tax rates vary based on whether the dividends are qualified or non-qualified.
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Qualified Dividends: These dividends are taxed at long-term capital gains rates, offering more favorable tax treatment. The tax rates for qualified dividends in 2023 and 2024 differ and are categorized based on filing status and income levels.
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Non-Qualified Dividends: Taxed at regular federal income tax rates, these dividends follow the same tax brackets as ordinary income. Similar to qualified dividends, the rates for non-qualified dividends in 2023 and 2024 vary depending on filing status and income.
Reporting Dividends on Tax Returns: If you have dividend income, it is reported on Form 1040. The amounts are entered on lines 3a (qualified) and 3b (non-qualified). Investors receive 1099-DIV forms from brokerages and financial institutions, summarizing dividend income. Reporting requirements may include Schedule B for those with more than $1,500 in non-qualified dividends or Schedule K-1 for certain investment structures.
Tax-Efficient Strategies: To minimize tax implications, investors can consider placing dividend-earning stocks in pre-tax retirement accounts. Retirement accounts, such as 401(k) or Roth IRA, offer tax advantages, allowing savings to grow tax-free until retirement. The choice between a 401(k) and Roth IRA depends on individual needs and tax considerations.
Conclusion: Dividends present an attractive avenue for earning extra income, especially in retirement. However, understanding and navigating the tax implications are crucial. Whether opting for qualified or non-qualified dividends, consulting with a financial advisor can provide personalized insights into how investment decisions align with overall financial goals.
By delving into the intricacies of dividend taxation, I hope to empower individuals to make informed investment decisions while optimizing their tax efficiency.
