How to Determine Your Qualified Dividends Tax Rate

The IRS categorizes dividends as either ordinary or qualified. Qualified dividends are taxed at a lower rate than ordinary dividends, which are taxed at your income rate. This brief article will help you determine your qualified dividends tax rate. Dividends are reported on Form 1099-DIV.

Difficulty: Easy

Instructions

1. 
    

   First, determine the portion of your dividends that are qualified. To keep it simple, common stock and some mutual fund dividends are typically qualified. You can find this information on your 1099-DIV.
   
   From www.irs.gov - Ordinary dividends are the most common type of distribution from a corporation. They are paid out of the earnings and profits of the corporation. Ordinary dividends are taxable as ordinary income unless they are qualified dividends. Qualified dividends are ordinary dividends that meet the requirements to be taxed as net capital gains.

2. 
    

   Next, determine your income tax bracket based on your level of taxable income and how you file taxes (single or joint/qualifying widow(er)). Please see articles on how to determine your 2008 and 2009 marginal tax rates.

3. If you discover that you are in the 10% or 15% taxable income bracket, you will pay 0% on your qualified dividends.

4. 
    

   If you discover that you are in the 25% taxable income bracket or above, you will pay 15% on your qualified dividends.

5. Knowing this information may help you make better informed investment decisions.

Tips & Warnings

• You may find it beneficial to work with a professional tax preparer.
• If you are in the 10% or 15% tax bracket, common stocks and common stock mutual funds/ETFs that pay high dividends may prove to be a very tax efficient long term investment. In general qualified dividends are considered tax efficient for all investors (highest income tax rate is 35%).