Can You Avoid Taxes on Dividend Income?

Key Takeaways:

• The IRS doesn’t tax dividends if your taxable income falls below a certain level. 
• You can also escape dividend income taxes by using a Roth IRA. 
• The IRS generally taxes dividend income at a lower rate than it taxes ordinary income. 

When You Don’t Have to Pay Taxes on Dividend Income

Let’s cover the (mostly) good news first. 

For the 2022 tax year (the one you already filed or are about to file), you don’t have to pay taxes on dividend income if your tax status is: 

• Single or married filing separately and you have taxable income of $41,675 or less. This rises to $44,625 for the 2023 tax year. 
• Married filing jointly and you have taxable income of $83,350 or less. This climbs to $89,250 for the 2023 tax year. 
• Head of household and you have taxable income of $55,800 or less. This rises to $59,750 for the 2023 tax year. 

In these scenarios, the federal tax rate on dividend income is 0%. 

In a second, we’ll run down the tax rate for people with taxable income higher than what you see above. 

Before we get there, know that if you keep your dividend stocks and dividend income in a retirement account, you can avoid taxes. Consult your tax and/or investment advisor to confirm the particulars of your situation, but generally: 

• In a traditional IRA, you defer taxes. But when you start withdrawing, you pay taxes on that money at the ordinary rate, not the lower dividend tax rate. 
• In a Roth IRA, you contribute after-tax money and don’t pay taxes on dividend income, even when you make qualified withdrawals, typically after you turn 59.5 years old. 

So the Roth IRA tends to make more sense for dividend investing from a tax standpoint. Of course, IRAs – aside from dividend concerns – have their own rules, regulations, and income limits on contributions. 

Here again, consult your tax person to be sure of the particulars of your situation and for specific details on how to report dividend income. 

For Everyone Else, When You DO Have to Pay Taxes on Dividend Income

For the rest of us, it looks like this for the 2022 tax year:

• If you file single, you’ll pay a 15% dividend tax if your taxable income is between $41,676 and $459,750. The rate rises to 20% on taxable income greater than $459,750. 
• For married filing jointly, you pay a 15% dividend tax if your taxable income is between $83,351 and $517,200. The rate rises to 20% on taxable income greater than $517,200.
• For married filing separately, you pay a 15% dividend tax if your taxable income is between $41,676 and $258,600. The rate rises to 20% on taxable income greater than $258,600. 
• For head-of-household filers, you pay a 15% dividend tax if your taxable income is between $55,801 and $488,500. The rate rises to 20% on taxable income greater than $488,500. 

These numbers rise roughly 7% across filing statuses for the 2023 tax year. 

The Bottom Line: Taxes. Something most of us don’t like to think about, let alone deal with. But they’re a fact of life that’s extra important if you’re an investor. 

If you go big on dividend investing, it might make sense to use a Roth IRA. But you need to consider factors other than shielding your dividends from taxes when making this and other investing decisions.

• Can FedEx Deliver?
• What Financial Professionals Are Researching
• All You Need Is Love and a Few ETFs
• 22 Most Profitable Stocks of the Last 20 Years