Why Are Qualified Dividends Not Taxed?

A qualified dividend is a dividend that falls under capital gains tax rates that are lower than the income tax rates on unqualified, or ordinary, dividends.

The dividend must have been paid by a U.S.

company or a qualifying foreign company.

The dividends are not listed with the IRS as those that do not qualify.

Do you have to pay taxes on qualified dividends?

Generally, any dividend that is paid out from a common or preferred stock is an ordinary dividend unless otherwise stated. Qualified dividends are dividends that meet the requirements to be taxed as capital gains. Under current law, qualified dividends are taxed at a 20%, 15%, or 0% rate, depending on your tax bracket.

How are qualified dividends taxed?

The dividend tax rate you will pay on ordinary dividends is 22%. Qualified dividends, on the other hand, are taxed at the capital gains rates, which are lower. If you have between $38,600 and $425,800 of ordinary income, then you will pay a tax rate of 15% on qualified dividends.

What determines if a dividend is qualified or nonqualified?

The most significant difference between the two is that nonqualified dividends are taxed at ordinary income rates, while qualified dividends receive more favorable tax treatment by being taxed at capital gains rates.

Why are qualified dividends taxed at a lower rate?

But qualified dividends are taxed at long-term capital gains rates – and those are meaningfully lower than ordinary income tax rates, regardless of your tax bracket. If your ordinary income tax bracket has you paying: 10% to 15%, your tax on qualified dividends is zero.

How do I avoid paying tax on dividends?

How to pay no tax on your dividend income

  • Maximize your deduction and adjustments. Everyone should max out their 401k contribution every year.
  • Do your own taxes so you understand the tax code better.
  • Reduce your taxable income.
  • Live in a state with no income tax.
  • If all else fail, you can always retire early and reduce your income that way.

What dividends are tax free?

The dividend tax rate you will pay on ordinary dividends is 22%. Qualified dividends, on the other hand, are taxed at the capital gains rates, which are lower. For the 2019 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.