How Dividends are Taxed

[marko]

Ok. An admittedly slow day here at the marko household.

No, this is not about dividends being taxed at a lower rate (or not at all).

I'm wondering how it works when dividends are taxed:
Is it as simple as the lower dividend tax being calculated separately and then added into the remaining tax due afterwards for a grand total?

If your dividends were taxed at 15% but your remaining taxable income (wages/SS) came to 25% I don't see how else they could do it.

Knowing the IRS I'm wondering if it's more complicated than that.

I realize this could be a very naive question -- I let my accountant deal with such details--so bear with me, ok?

 

[Crabby Mike]

I use an accountant for my taxes, but questions like this are why I still buy TurboTax every year. I run all sorts of scenarios to sort these things out -- including this one, though I don't recall the answer exactly. Sorry ...

 

[meierlde]

If you follow the dividends and capital gains worksheet (also in turbotax) https://apps.irs.gov/app/vita/content/globalmedia/capital_gain_tax_worksheet_1040i.pdf
Essentially take the total income subtract the qualified dividends and long term capital gains, calculate the tax on the rest at regular rates and the tax on the dividend bucket at the dividend/capital gains rate, and add the two. At the end the tax on all the income at regular rates is compared to the sum above and you pay the lower.

 

[ocean view]

The actual calc can be performed by hand using the Qualified Dividend & Capital Gain Worksheet

https://apps.irs.gov/app/vita/content/globalmedia/capital_gain_tax_worksheet_1040i.pdf

But you are correct, the income that is subject to lower or different tax rates than earned income is segregated and tax effected using this worksheet. Then that segregated income is subtracted from your total taxable income for the “regular “ tax brackets to be applied.

 

[audreyh1]

Ok. An admittedly slow day here at the marko household.

No, this is not about dividends being taxed at a lower rate (or not at all).

I'm wondering how it works when dividends are taxed:
Is it as simple as the lower dividend tax being calculated separately and then added into the remaining tax due afterwards for a grand total?

If your dividends were taxed at 15% but your remaining taxable income (wages/SS) came to 25% I don't see how else they could do it.

Knowing the IRS I'm wondering if it's more complicated than that.

I realize this could be a very naive question -- I let my accountant deal with such details--so bear with me, ok?

No - because you pay 0% tax on qualified dividends if your ordinary income is low enough.

The spreadsheet is rather complicated.

 

[pb4uski]

Basically, if your taxable income is under $38,600 single/$77,400 MFJ then all qualified dividends and LTCG are taxed at 0%.

If your ordinary income exceeds $38,600 single/$77,400 MFJ then all qualified dividends and LTCG are taxed at 15% (or more when income gets really high).

If your taxable income is over $38,600 single/$77,400 MFJ but ordinary income is under, then the excess over $38,600 single/$77,400 MFJ is taxed at 15% and any dividends and LTCG under $38,600 single/$77,400 MFJ are taxed at 0%.

The graphs in the middle of this article may be useful in understanding the principle... but the dollar amounts have increased since 2014 when the article was written. https://www.kitces.com/blog/underst...st-capital-gains-for-a-free-step-up-in-basis/