Tax Rate on Capital Gains
The tax rate on most net capital gain is no higher than 15% for most individuals. Some or all net capital gain may be taxed at 0% if your taxable income is less than $78,750.
A capital gain rate of 15% applies if your taxable income is $78,750 or more but less than $434,550 for single; $488,850 for married filing jointly or qualifying widow(er); $461,700 for head of household, or $244,425 for married filing separately.
However, a net capital gain tax rate of 20% applies to the extent that your taxable income exceeds the thresholds set for the 15% capital gain rate.
There are a few other exceptions where capital gains may be taxed at rates greater than 20%:
• The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
• Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.
• The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.
Note: Net short-term capital gains are subject to taxation as ordinary income at graduated tax rates.
Tax Rate on Dividends
Currently, the maximum tax rate for qualified dividends is 20%, 15%, or 0%, depending on your taxable income and tax filing status. For anyone holding nonqualified dividends in 2020, the tax rate is 37%.
Dividends are taxed at different rates depending on how long you’ve owned the stock. While nonqualified dividends are taxed at the same rate as ordinary income, other dividends are taxed at a lower rate.
In simple terms, qualified dividends are the dividends paid from stocks that you’ve held for a long time and come with the perk of a lower tax rate. These dividends are taxed at the same rate as long-term capital gains. This means that you’ll pay 15% on dividend income, though anyone earning more than $425,900 on their own or $479,000 with their spouse could pay as much as 20%.
On the other hand, anyone earning less than $38,600 on their own or $77,200 with their spouse will pay no tax on their dividend income. These dividend tax rates depend on how much you earn from your main income as well as how long you hold onto your stock. The best advice to avoid having to pay higher dividend tax rates is to hold onto your stocks for a few months minimum.
NOTE: The definition of how long is long enough to deem a stock qualified can rest in a grey area. Usually, if you own the stock for more than 60 days during the 121-day period that began 60 days before the ex-dividend date (the day when you must own the stock to receive the dividend) - the dividend is usually considered qualified.
Nonqualified (also referred to as ordinary) dividends are classified as dividends that don’t meet the standard of a qualified dividend. These dividends are taxed the same as an investor’s personal income tax bracket. For example, if you’re within the 27% tax bracket, you’ll pay a 27% dividend tax on your nonqualified dividends.
he tax rates for ordinary dividends are the same the federal income tax rates, and these rates remain unchanged from 2019 to 2020. However, the income thresholds for each bracket increases slightly in 2020 to account for inflation. Similarly, the capital gains rate, which you pay for qualified dividends, is the same as 2018 but the brackets changed slightly due to inflation.
So for the 2020 tax year (which you’ll file in early 2021) the dividend tax rates are as follows.
|2020 SINGLE FILER TAX BRACKETS|
|Income Tax Bracket||Income Tax Rate||Capital Gains Rate|
|$0 – $9,875||10%||0%|
|$9,876 – $40,000||12%||0%|
|$40,001 – $40,125||12%||15%|
|$40,126 – $85,525||22%||15%|
|$85,526 – $163,300||24%||15%|
|$163,301 – $207,350||32%||15%|
|$207,351 – $441,450||35%||15%|
|$441,451 – $518,400||35%||20%|
|2020 JOINT FILER TAX BRACKETS|
|Income Tax Bracket||Income Tax Rate||Capital Gains Rate|
|$0 – $19,750||10%||0%|
|$19,751 – $80,000||12%||0%|
|$80,001 – $80,250||12%||15%|
|$80,251 – $171,050||22%||15%|
|$171,051 – $326,600||24%||15%|
|$326,601 – $414,700||32%||15%|
|$496,601 – $622,050||35%||20%|
Are Dividends Worth It?
Dividends are particularly popular in retirement accounts and with retirees. Because you do not have to pay tax on income in a retirement account, dividends you earn in a retirement account are untaxed. That means you can reinvest those dividends to further grow your savings, without the government taxing them first.
Dividends can also provide a steady source of income in retirement. However, don’t forget that dividends are not a guarantee. A company or fund could stop paying dividends and even an established company has the potential to go under.
If you are unsure what tax implications dividends will have for you, the best thing to do is talk to a financial advisor. A financial advisor will be able to look at how an investing decision will impact you while also considering your overall financial picture. We recommend using our free financial advisor matching service to help you find advisors who meet your specific criteria.
Avoid Dividend Taxes with a Retirement Account
The biggest way to avoid taxes on dividends is to put dividend-earning stocks in a retirement account. The benefit of retirement accounts is that your money grows tax-free. You will still need to pay taxes either before or after you contribute the money, but you will not have to pay tax as your savings grow within the account.
What kind of retirement account you use will depend on your personal needs. Two common options are a 401(k) plan and a Roth IRA. A 401(k) is sponsored by your employer and takes pre-tax money; you pay income tax when you withdraw funds. A Roth IRA takes post-tax money; you don’t get to deduct the money you put in, but once it’s in, your money grows tax-free and then can be withdrawn as tax-free income. Here’s a breakdown of 401(k) plans vs. IRAs to help you make the best choice for you.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional