Dividends Tax Rate – Understanding How Dividends are Taxed

Now that the first month of 2020 is almost over, it’s time to really start thinking and working on taxes.  I am sure many of us are gathering tax-related documents for 2019, as well as (should be) planning for 2020 taxes.  Documents that will pour in are 1098-INT, 1099-INT and… 1099-DIV for dividends received.  Today’s investing topic is about bringing awareness to Dividends and Taxes!

dividends tax, taxes, dividend investing

Dividends Tax Rate

One of the immense beauties of dividend investing has to do with taxes.  Yes, Dividend Investing and Taxes are a beautiful marriage that all investors should enjoy!  I know what you are thinking, is there really a reason for us to love something about taxes?  If true, how so?

In short, dividends are taxed at a far lower tax rate than your normal W-2 wage income.  Your Dividends are taxed at the long-term capital gains tax rate (on Qualified Dividends, that is).  That rate is capped at 20% on the maximum level and 0% (obviously) at the minimum level.  Ordinary dividends are taxes at your ordinary income rate, however, so keep that in mind.

What exactly are those dividend tax rates?  Here are the dividend tax brackets broken down below on Qualified Dividends:

If your income is in the $0-$39,700 ($0 to $78,750 for Married Filing Joint) taxable income bracket, you pay 0.00% in taxes.

Next, if your income is in the $39,701 to $434,550 ($78,751 to $488,850 for Married Filing Joint) taxable income bracket, you pay 15.00% in taxes.

Lastly, if your income is in the > $434,500 (>$488,850 for Married Filing Joint) taxable income bracket, you pay 20.00% in taxes.

How amazing is that?  You can earn taxable income, if you’re single, up to $39,700 and your dividends are not even taxed!  ZERO dollars, that’s it.  In addition, if you are married, you can bring home almost $80,000 and you still are not taxed on qualified dividends.

Related: The Power of $50,000 Dividend Income, Explained

Related: What is a Dividend?

Dividend Investing and Taxes

What does this mean for dividend investors?  There are many strategies one can take.  I will list out a few investing scenarios for you, as well as the tax implication of what that could mean.

You are a relentless investor.  Your portfolio provides you $80,000 in dividends per year, because you built this powerful $2.25 million dividend portfolio.  That is your ONLY income.  You are married and take the basic standard deduction (BSD), which is $24,400 (for 2019). Your taxable income is $55,600.  Newsflash dividend investor.  Ding, ding, ding!  That will be $0.00 in federal taxes.

Say you earn the average salary and have wages of $50,000 per year and you also have $35,000 in dividends coming in ($1 million portfolio), for a total of $85,000 per year.  You are single.  Your BSD is $12,200 (for 2019).  This means you have a total of $72,800 in taxable income and fall in the 15% bracket, explained above. Your taxes you pay on dividends of $35,000 are $5,250.  Therefore, your dividends tax rate is 15%.

However, what if you have wages of $60,000 per year, $15,000 in dividends but also invested $19,000 in your 401k at work, as well as put $2,500 into a Health Savings Account (HSA).  Further, you put $6,000 in your traditional IRA.  You are a saver, big time, and have done this for many years.  Your adjusted gross income equates to $32,500 and then you also have the BSD of $12,200, bringing you down to $20,300 + $15,000 in dividends, for a total of $35,300.  You will not pay any federal taxes. Thus, your dividends tax rate is 0.00%.

Related: Strategy Adjustment – Taxes, Part 3

Related: How I Kicked Uncle Sam’s @$$ with an effective 10.34% Tax Rate

Financial Freedom from Dividends and Taxes

Now, reading the above summarizes into one over-arching theme.  You can reach financial freedom by way of dividends, due to the low-to-no tax impact on that type of income received.

As extra income on the side, dividends are taxed lower and thus you are able to get more out of each dollar you receive – whether that be to pay for your cost of living or place more funds into investment.

If dividends are your sole income – you can essentially earn $51,900 or $103,150 in dividend income if you are single or married, paying $0.00 in federal taxes.

Folks, the dividends tax rate and ability to propel your financial well being is significant.

Related: Dividend Investing to Take Back Control

Community – do you have any questions?  What else are you doing to push income down to lower levels/brackets?  Is this helpful to know or does this help push you to start dividend investing?

23 thoughts on “Dividends Tax Rate – Understanding How Dividends are Taxed

  1. How do REITs affect your scenarios? Is there also a point of zero taxes? Or are you always paying the taxes due to it being considered ordinary income.

  2. Being in a DINK household (double income – no kids for those who haven’t seen that acronym) we won’t be seeing a $0 tax rate during our working lifetime. I always start with the expectation that 15% is gone before I get it. So if we assume a 2% inflation rate I would need a 2.4% minimum yield just to stay even on my money this year after taxes. It makes me focus on more established companies that have decent dividend growth as well. The Aristocrats are my friends in most of my accounts because of this, but I keep digging for long term plays that may be in the cusp of that status at all times. Good luck out there everyone – stay long the US market and capitalism. Our future depends on it!

    • DDD –

      You better believe it. O/Realty income just became an aristocrat, so definitely have your eyes on those, “just about there” status. Further, I agree – need to constantly think of dividend growth. The tax implication of dividend income, even at 15%, is still A LOT better than 20%+!


  3. DDs,
    It has always been apparent that dividends are geared towards the people who write the laws and thus can benefit the most from them. Case and point are those percentages right there vs actively earned income tax brackets!
    Part of the reason I like dividend investing for financial independence more than other methods. That plus its fun.
    – Gremlin

    • Gremlin –

      100% agreed. Also – trying to get this knowledge out so individuals can think, save and invest more! Dividend income is phenomenal and the power of it, from a tax perspective, makes it even better.


  4. Most people hate dealing with taxes. To me it’s another challenge to personal finance. I appreciate these posts. A little bit of tax planning goes a long way.

    DGIs should consider taxes when deciding when to retire. The day you dump the ordinary income attached to your salary and replace it with pure dividend income…the tax savings practically offset the lost income.

    • Passive –

      Thank you, LOVE that you also enjoy the challenge as I do. It does. You can implement a few adjustments and similar to saving money – it adds up.

      The tax savings from dividend income vs. wage income is AMAZING. My $50,000 income vs. dividend income shows those results based on previous tax rates.


  5. Good info, and to your question, “What else are you doing to push income down to lower levels/brackets?” …

    1) Migrating all my Canadian stocks to my IRA. This to avoid Canada’s 15% withholding and take advantage of the tax treaty, and
    2) This will make some room to remain under the IRS threshold to avoid having to use the more cumbersome Form 1116,
    3) If additional room is required, (to retain the credit versus deduction) I can always move my UK, Hong Kong and Singapore stocks into the IRA as those countries have no withholding (at this time)

  6. Good write up, but don’t forget about the ACA net investment tax that adds an extra 3.8% on top of the 15 and 20 dividend rate brackets for those exceeding $200,000 single and §250,000 married.

  7. Thanks for the great write up DD’s

    With taxes around the corner its time to start getting all the necessary forms collected. Makes for half the battle! However, based off of your examples above, the ultimate goal is to have all our expenses paid off in the next 10 years. Then the wife and I will retire off the massive dividends we hope to have coming in by then

    Ah, what a dream indeed

    Thanks for the great write up

    • Dr Div –

      LOVE the name/icon as well, by the way. Yes – taxes are right around the corner. Goal is to have enough dividend cash flow to cover all expenses for the quality of life that you want. $1.00 in dividends is the equivalent of almost $1.40-$1.50 when it all comes down to it ($1.50 X (1-.30).


  8. Love this article Lanny.
    Late last summer, I got out of some REITs that I idiotically bought years ago that started sinking into oblivion.
    I sold and now have a Capital Gains Loss to take on my taxes that will roll over into the 2020 tax year. I’m going ot end up with a fat tax return.


    • Thanks CW –

      Nice job cleaning up your positions, and receiving the tax benefit, no doubt.

      Now you’ll be working on clean dividend investments to drive up the lower-taxed dividend income, GO GET IT!!


  9. Great topic and summary of why dividend income is a great tax saving tool. I am shocked at how many people in the personal finance community constantly complain about not wanting to earn dividend income from their taxable accounts. Personally, that is where I want all my dividends to be earned.

  10. I noticed that you guys follow the investing for dividends in your tax deferred accounts. Could you provide some color around the rationale for that? From a tax standpoint it would seem that we should be investing for dividends in our taxable accounts to benefit from the lower tax rates. Wouldn’t we lose that advantage by converting dividend income realized in our tax deferred accounts into ordinary income when withdrawn in the future?

Leave a Reply

Your email address will not be published. Required fields are marked *