Ordinary and Qualified Dividend Tax Rates


Dividends are great. I love dividends. Dividends are when a company pays you just for holding onto their stock. The only downside for dividends? Taxes. Nobody likes taxes.

Unfortunately, there is no way to avoid paying them though. The question is, how much will you owe at the end of the year? And the answer to that question will depend on a few things.

The type of dividend – Qualified dividend or ordinary dividend – as well as the amount you made from the dividends and your total income for that year.

Ordinary and Qualified Dividend Tax Rates
Ordinary and Qualified Dividend Tax Rates

There are Two Types of Dividends.

Qualified dividends and ordinary dividends. What is the difference between the two? Mostly the amount of taxes you will pay. To figure out what type of dividends you received, you must figure out how long you’ve held the stock paying you those dividends.

The IRS says that during the 121-day period, beginning 60 days before the ex-dividend date, if a stock is held for over 60 days, it is considered a qualified dividend”.

The ex-dividend date is a way for a company to know if the shareholder has held onto a stock long enough to qualify for the dividend payment. On the other hand, ordinary dividends – or non-qualifying dividends – include such things as employee stock options and real estate investment trusts (REITs).

It’s important to know you will owe taxes at the end of the year on both qualified dividends and non-qualified dividends. It doesn’t matter if your broker offers an automatic reinvested dividends plan, or you manually reinvest the dividends yourself.

Dividends are always considered income and are therefore taxed according to the IRS. However, ordinary dividends and qualified dividends are taxed at a different rate.

The Dividend Tax Rate for Ordinary Dividends and Qualified Dividends

The dividend tax rate for ordinary dividends is the same as your regular federal income tax rates. The tax rate for qualified dividends is slightly different.

Qualified dividends are not taxed if your total annual income is less than $38,600. Anything over that amount, up to $425,800, is taxed at 15%. If you happen to earn even more than that this year, your qualified dividends will be taxed at 20%. The following is the current tax rates for filing your 2020 taxes:

2019 SINGLE FILER TAX BRACKETS

Income Tax Bracket Tax Rate Capital Gains Rate

  • $0 – $9,700 10% 0%
  • $9,526 – $39,375 12% 0%
  • $39,376 – $39,475 12% 15%
  • $39,476 – $84,200 22% 15%
  • $84,201 – $160,725 24% 15%
  • $160,726 – $204,1003 2% 15%
  • $204,101 – $434,550 35% 15%
  • $434,551 – $510,300 35% 20%
  • $510,301+ 37% 20%

2019 JOINT FILER TAX BRACKETS

Income Tax Bracket Tax Rate Capital Gains Rate

  • $0 – $19,4001 10% 0%
  • $19,401 – $78,750 12% 0%
  • $78,751 – $78,950 12% 15%
  • $78,951 – $168,400 22% 15%
  • $168,401 – $321,450 24% 15%
  • $321,451 – $408,200 32% 15%
  • $408,201 – $488,850 35% 15%
  • $488,851 – $612,350 35% 20%
  • $612,351+ 37% 20%

As a side note, this information will be a little different for 2020 (which you will file in 2021) so it’s important to familiarize yourself now while it’s in your mind. The tax rates will remain the same, however, the income threshold for each tax bracket has slightly increased. Also, the capital gains tax bracket received from qualified dividends has also changed slightly. Both of these are the result of inflation and will look as follows:

2020 SINGLE FILER TAX BRACKETS

Income Tax Bracket 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%

2020 JOINT FILER TAX BRACKETS

Income Tax Bracket 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%

Reporting your Dividends

Reporting your dividends onto your tax returns is quite easy. Your broker is required to issue your 1099-DIV forms by January 31st however, it may take a few days extra if it is being sent through the mail.

You will fill out the information on your 1040. For ordinary dividends, you will fill out the lines on 3b. For qualified dividends, you will fill out line 3a. If you made less then $10 last year in dividends, you may not receive a 1099-DIV form.

If this is your situation, you should still put that information on your 1040. Ordinary dividends of over $1,500 should be reported on Schedule B and attached to your 1040. Dividends from a trust, estate, partnership, LLC or S corporation will also come with a Schedule K-1.

The same is true for partnered ETFs. However, all the information you need for reporting your dividends will be found on your 1099-DIV forms.

Dividends Have Many Benefits

These benefits are amplified if invested through a retirement account. This is because all dividends are tax-free inside of a retirement vehicle. Meaning you can reinvest your dividends without them being taxed first. Dividends are also a great choice for creating a source of passive income during your retirement. Of course, all investments come with their own risks and you must do your own research to determine if they are a good fit for you and your risk tolerance. I’m not a finance professional and this is not financial advice, just my opinion and personally, I have found great success with dividend ETFs.

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