Receiving dividends regularly provides an excellent opportunity to earn more money. If you are retired, the money can supplement your income and make it more comfortable. The good news is that there are some tactics you can use to avoid dividend taxes.
The Capital Gains Tax Rate
Taxes on dividends partially depend on how much income you get each year. Because there is a capital gains tax threshold, it is possible to avoid paying any taxes on your dividends if you make below a certain amount. The Internal Revenue Service (IRS) says that in 2022 a single person can make up to $41,675 and not pay any capital gains taxes, and a married couple filing jointly can earn up to $83,350. A head of household can make up to $55,800 and avoid paying any capital gains tax.The tax rate goes up when your income is higher than the above amounts. The taxes jump to 15 percent when the income for a single person ranges from $41,675 to $459,750, and when married couples filing jointly earn between $83,350 and $517,200. Any income higher than the amounts above are taxed at 20 percent.
Limitations on Your Losses
If you have investments in stock or other tools that result in losses, there is a limit on how much you can claim. When your losses are greater than your capital gains, you can use them to lower your taxable income. Losses up to the smaller amount of $3,000, or the actual loss amount, can be reported on line 16 of a Schedule D on your 1040 taxes. You can claim any losses greater than $3,000 on future taxes.Qualified dividends have the benefit of being taxed at a lower rate than your ordinary income—which could be taxed as high as 37 percent. These stocks are held longer than the required holding period. The company, U.S. or foreign, will be listed on one of the major stock exchanges.
Identifying whether your dividends are qualified or non-qualified is not difficult. BusinessInsider says you can tell the difference by whether your annual 1099-DIV reports your dividends and any other distributions in Box 1a or 1b. You can find the qualified dividends in Box 1b.
Reinvesting Your Dividends
One option with your dividends is to reinvest them and buy more stock. Investopedia says it is a mistake to think you can avoid paying taxes on the gains by reinvesting.The IRS treats those dividends the same as if you had received cash. If they were ordinary dividends—even though the money was reinvested—you will be taxed on the money as income.
Avoiding the Capital Gains Tax on Dividends
Instead of paying the required capital gains tax on your dividends, there are several ways to avoid them.Roth Retirement Accounts
Select Investments
Education Accounts for Children
LendingTree says that more than 30 states offer tax deductions or credits for contributions to a 529 Plan. They may vary in the amount of the permitted deduction and contribution limits, but you can invest in plans outside of your state.
Nontaxable Dividends
If you are looking to build your wealth, this may not be the type of bonds you want to invest in. Investopedia reports that they generally have lower interest rates than taxable securities. When you want to build your wealth, you are better off investing in ordinary stock.
Consider Aftertax Charges
When considering where to invest your money, you must think about more than just the profit. Fidelity advises that you should also consider what your final yield will be after looking at pre- and after-taxes. By looking at both before you invest, you may be able to keep more money.If you need help finding the best ways to avoid taxes on your dividends, talking to a financial planner can help. They can show you some excellent investment strategies and how to avoid paying taxes.
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