Definition and Breakdown of Dividend Tax Rates for 2024
May 23, 2023
Your dividend tax rate varies depending on whether you have qualified or ordinary dividends. It is essential to know the difference between how each dividend is taxed.
In a nutshell, qualified dividends are taxed at lower amounts, while ordinary dividends, like regularly earned income, are taxed by the IRS.
There are other key considerations for defining and estimating dividend tax rates, and this article is the perfect resource for you.
Keep reading to learn more!
Key Takeaways
- A qualified dividend is a type of dividend that is entitled to capital gains tax rates.
- Qualifying dividends must be held for 61 days within the 121 days that commenced after the 60-day period before the ex-dividend rate.
- Dividend tax rates range from 0% to 15% for qualified dividends and 10% to 37% for ordinary dividends.
- Form 1099-DIV is distributed by investment or mutual fund corporations and companies to investors. Form 1040 is used to report dividend income on tax returns.
- Effective ways to reduce dividend tax rates are following the holding period for the qualified dividend, setting aside cash in advance to pay taxes, and using retirement accounts.
What is a Qualified Dividend?
A qualified dividend is a regular type of dividend that qualifies for a capital gains tax rate. Regular or ordinary dividends are compensations made by publicly listed companies to their shareholders.
The IRS has a set of special requirements for a dividend to be considered qualified. When qualified dividends are reported as capital gains to the IRS, it withholds a lower amount of taxpayer’s money, ranging from 0% to 20%.
One basis for qualifying dividends is if the stock is held for 61 days within the 121-day period that followed the 60-day limit of the ex-dividend date. Or else the qualifying dividend is taxed as regular income at the end of the tax year.
Another criterion for a dividend to be qualified is if it was paid for by a US-based company. If the dividend was paid by a non-U.S. company, it must be a qualifying foreign organization or one that is incorporated in property by the U.S.
What is a Dividend Tax Rate?
A dividend tax rate is the tax treatment of the U.S. government on dividends. It sets the percentage paid by shareholders on distributed corporate earnings.
The IRS has set different tax rates for qualified and ordinary dividends. Qualified dividends share similar tax rates as capital gains and are relatively lower compared to the taxes imposed on ordinary dividends.
Meanwhile, ordinary dividends are taxed in the same manner as regular income. Ordinary dividend tax rates for the tax years 2023 and 2024 range from 10% to 37%.
There are exceptions to imposing dividend tax rates, such as retirement account shares and dividends earned by taxpayers who belong to the lowest tax bracket are tax-exempt.
Dividend Tax Rate for the 2022 Tax Year
QUALIFIED DIVIDEND TAX RATES (2022) | ||||
|---|---|---|---|---|
Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
0% | $0–$41,675 | $0–$83,350 | $0–$41,675 | $0–$55,800 |
15% | $41,676–$459,750 | $83,351–$517,200 | $41,676–$258,600 | $55,801–$488,500 |
20% | $459,751 and higher | $517,201 and higher | $258,601 and higher | $488,501 and higher |
ORDINARY DIVIDEND TAX RATES (2022) | ||||
|---|---|---|---|---|
Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
10% | $0–$10,275 | $0–$20,550 | $0–$10,275 | $0–$14,650 |
12% | $10,276–$41,775 | $20,551–$83,550 | $10,276–$41,775 | $14,651–$55,900 |
22% | $41,776–$89,075 | $83,551–$178,150 | $41,776–$89,075 | $55,901–$89,050 |
24% | $89,076–$170,050 | $178,151–$340,100 | $89,076–$170,050 | $89,051–$170,050 |
32% | $170,051–$215,950 | $340,101–$431,900 | $170,051–$215,950 | $170,051–$215,950 |
35% | $215,951–$539,900 | $431,901–$647,850 | $215,951–$539,900 | $215,951–$539,900 |
37% | $539,901 and higher | $647,851 and higher | $539,901 and higher | $539,901 and higher |
Dividend Tax Rate for the 2024 Tax Year
QUALIFIED DIVIDEND TAX RATES (2022) | ||||
|---|---|---|---|---|
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% | $44,626–$492,300 | $89,251–$553,850 | $44,626–$276,900 | $59,751–$523,050 |
20% | $492,301 and higher | $553,851 and higher | $276,901 and higher | $523,051 and higher |
QUALIFIED DIVIDEND TAX RATES (2023) | ||||
|---|---|---|---|---|
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% | $11,001–$44,725 | $22,001–$89,450 | $11,001–$44,725 | $15,701–$59,850 |
22% | $44,726–$95,375 | $89,451–$190,750 | $44,726–$95,375 | $59,851–$95,350 |
24% | $95,376–$182,100 | $190,751–$364,200 | $95,376–$182,100 | $95,351–$182,100 |
32% | $182,101–$231,250 | $364,201–$462,500 | $182,101–$231,250 | $182,101–$231,250 |
35% | $231,251–$578,125 | $462,501–$693,750 | $231,251–$346,875 | $231,251–$578,100 |
37% | $578,126 and higher | $693,751 and higher | $346,876 and higher | $578,101 and higher |
How to Report Dividend Income on Your Taxes
Form 1099-DIV is used to report ordinary dividends (Box 1a), qualified dividends (Box 1b), and non-dividend distributions (Box 3). The form is given by investment fund corporations and companies to investors when the amount of dividend income paid out exceeds $10 within the year.
Use Form 1040 to report your dividend income on your tax return. Fill out Line 3a for qualified dividends and Line 3b for ordinary dividends. Form 1040 also comes with a Qualified Dividends and Capital Gain Tax Worksheet if you want to assess the percentage of preferred tax rates on your qualified dividends.
If you are generating dividend income from multiple sources or have earned over $1,500 in dividends, use Schedule B of Form 1040.
Tips for Controlling Your Dividend Tax Bill
Here are some insightful tips on how you can notably regulate your dividend tax bill:
#1. Pay Attention to the Calendar
Keep a close watch on the maximum holding period before the ex-dividend date. Hold onto your dividends for at least 60 days to maintain its status as a qualified dividend. Once you exceed the prescribed period, your dividend will be taxed at a higher percentage.
Remember, qualified dividends are taxed at a much lower rate than non-qualified dividends.
#2. Put Some Cash Aside
Unlike with regular income, where taxes are automatically withheld by employers, paying dividend taxes may not always be cyclically deducted from your paycheck. This is not entirely a bad thing since you can estimate the taxes you have to pay and set aside funds to fulfill your dividend taxes.
In the meantime, you can also consult with a tax accountant to help you make accurate estimates of your dividend tax rates.
#3. Use a Retirement Account
The dividends you pay for retirement accounts such as 401(k), traditional IRA, and Roth IRA investments are usually deferred from taxes. Consider investing in any of these retirement accounts, but be mindful of the differences in tax considerations between each plan.
401(k) plans let you remit money into your account pretax and defer taxes on investment profits, capital gains, and dividends.
Traditional IRA lets you invest money on a pre-tax basis, meaning that you pay less taxes. Once you reach the age of 59 ½, you can take your dividends and contributions, then have the taxes in your account deferred.
A Roth IRA is the best option if you want 100% tax-free dividends. Unlike 401(k) and traditional IRA plans, a Roth IRA allows you to defer money after tax and even contribute to and withdraw money from your account without having to worry about tax consequences.
Final Thoughts
Qualified and ordinary dividends are excellent alternatives if you want investments that provide steady cash flow. However, you must consider the corresponding tax rates and provisions based on your dividend type.
Check your tax bracket, filing status, retirement accounts, and dividends to verify whether you qualify for capital gains and a remarkably lower tax rate.
