are dividends taxed as a "step bracket" ?

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Peppergrass
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are dividends taxed as a "step bracket" ?

Post by Peppergrass » Sat Jul 28, 2018 4:21 pm

Hi guys,

one question I had.. is qualified dividends taxed at the brackets ( 0% / 15% / 20% ) or do they just see total income and tax all at highest bracket?

like is some of my dividends getting taxed at 0%, then move to 15% then if you make enough to 20% ??? OR say for example I got 1 million in dividends, is it just all taxed at 20% ??

sorry as I don't know the actual technically terms of the "brackets" or "step laddering" I would call it..


thank you guys

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grabiner
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Re: are dividends taxed as a "step bracket" ?

Post by grabiner » Sat Jul 28, 2018 4:26 pm

Qualified dividends are taxed in brackets, just as ordinary income is. If your ordinary taxable income plus qualified dividends is less than $X (where $X depends on your filing status), you pay no tax on the qualified dividends. For every dollar of qualified dividends which brings the total above $X, you pay 15 cents of tax, up to a much higher value of $Y. For every dollar of qualified dividends which brings the total above $Y, you pay 20 cents of tax.
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Re: are dividends taxed as a "step bracket" ?

Post by zmaqoptyxbglp » Sat Jul 28, 2018 4:32 pm

It is not a flat rate based on the gross. So your money gets taxed at each of the applicable bracket rates. But I just want to bring to your attention the fact that you are missing the 3.8% Net Investment Income Tax, not to mention state income taxes, which most states have.

47Percent
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Re: are dividends taxed as a "step bracket" ?

Post by 47Percent » Sat Jul 28, 2018 5:54 pm

Append the qualified dividend income to your other income at the tail end.
Then apply the corresponding rates to portions of qualified dividend income depending on which tax bracket that particular portion falls in.

Following from the link: https://obliviousinvestor.com/2018-tax-brackets/

Capital Gains and Qualified Dividends
Long-term capital gains and qualified dividends will still have 0%, 15%, and 20% tax rates. The income thresholds separating those different tax rates, however, have changed. For 2018, long-term capital gains and qualified dividends will face the following tax rates:
0% tax rate if they fall below $77,200 of taxable income if married filing jointly, $51,700 if head of household, or $38,600 if filing as single or married filing separately.
15% tax rate if they fall above the 0% threshold but below $479,000 if married filing jointly, $452,400 if head of household, $425,800 if single, or $239,500 if married filing separately.
20% tax rate if they fall above the 15% threshold.
Note that threshold for the top of the 0% tax rate is close to but not the same as the top of the 12% tax bracket.
The 3.8% tax on net investment income that can apply if your modified adjusted gross income exceeds $200,000 ($250,000 if married filing jointly) is unchanged.

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Re: are dividends taxed as a "step bracket" ?

Post by JGoneRiding » Sat Jul 28, 2018 6:18 pm

grabiner wrote:
Sat Jul 28, 2018 4:26 pm
Qualified dividends are taxed in brackets, just as ordinary income is. If your ordinary taxable income plus qualified dividends is less than $X (where $X depends on your filing status), you pay no tax on the qualified dividends. For every dollar of qualified dividends which brings the total above $X, you pay 15 cents of tax, up to a much higher value of $Y. For every dollar of qualified dividends which brings the total above $Y, you pay 20 cents of tax.
Just in case it wasn't clear to OP. If your ordinary taxable income is already x or y and then you add on qualified dividends on top of the ordinary income., then yes all of it would be taxed at 15 or 20% but the dividends would not be at your tax bracket rate.

So say you are single and make 45k a year then all the dividends would be taxed at 15%up till they hit y. Then over y the reminder at 20%.

retiredjg
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Re: are dividends taxed as a "step bracket" ?

Post by retiredjg » Sun Jul 29, 2018 9:24 am

Reminder, if your total income goes over $200k (single) or $250k (MFJ) there is an additional tax - NIIT - of 3.8% on qualified dividends and long term capital gains that spill over that limit. NiIT = Net Investment Income Tax.

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Earl Lemongrab
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Re: are dividends taxed as a "step bracket" ?

Post by Earl Lemongrab » Sun Jul 29, 2018 1:16 pm

Right now, I'm effectively in a "27% bracket". That's because my ordinary income is around 30k in retirement. So I have about 8.7k in 0% qualified dividend space, which I will fill up. So every dollar of ordinary income I add will be taxed at 12% and pushes a dollar of dividends up into the 15% bracket.

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Peppergrass
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Re: are dividends taxed as a "step bracket" ?

Post by Peppergrass » Sun Jul 29, 2018 6:49 pm

guys are amazing, thanks!!! I say this every time, but all you are so willing to help and take time to explain, really appreciate this community here!

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Kevin M
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Re: are dividends taxed as a "step bracket" ?

Post by Kevin M » Sun Jul 29, 2018 7:06 pm

Just to elaborate a bit on the replies so far, you could have some taxed at 0% and some at 15%, all taxed at 15%, some at 15% and some at 20%, or all at 20%. This ignores the net investment income tax of 3.8%, which some have already mentioned, so you need to add that on at higher incomes.

For the marginal tax rate of 27% that was mentioned, which applies to me as well, some QD is taxed at 0% and some at 15%. Each marginal dollar of ordinary income pushes an additional dollar or QD from 0% to 15%. Once your ordinary income reaches the top of the 12% bracket (approximately--there is a $200 difference between top of 12% bracket and top of 0% QD/LTCG "bracket"), all QD is taxed at 15% until the NIIT of 3.8% bumps it to 18.8%.

Kevin
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