Qualified dividends are generally taxed as long-term capital gains. This means that if your highest tax bracket is 15% or less, you will receive these tax-free dividends. If your marginal tax rate is higher than 15%, your qualifying dividends will be taxed at 15% or 20%, depending on your income. Qualified dividend income that exceeds the upper limits of the 15% bracket requires paying a 20% tax rate on any remaining qualifying dividend income.
Depending on your specific tax situation, qualifying dividends may also be subject to 3.8% net investment income tax. The federal government taxes unqualified dividends according to regular income tax rates and brackets. You can avoid paying taxes on your capital gains by deducting your losses, seeking other tax deductions, or donating shares to charities. Like other investment income, dividends may be subject to better tax rates than other forms of income if they meet the requirements in the eyes of the IRS.
Schedule B Ordinary Interest and Dividends is the schedule you use to list ordinary interest and dividends when you file your tax return with the IRS. You'll still have to pay taxes before or after you contribute the money, but you won't have to pay taxes as your savings grow in the account. With TurboTax Live Full Service Premium, have a specialized expert discover all the tax deductions and file your taxes on investments and self-employment. Interest dividends on state or municipal bonds are generally not subject to taxes at the federal income tax level, unless they are subject to the Alternative Minimum Tax (AMT).
Net investment income tax is an additional 3.8% tax that applies to dividend income and realized profits. Your dividends would then be taxed at 15%, while the rest of your income would follow federal income tax rates.