Do You Pay State Taxes on Dividends and How

If you're a dividend investor, you're likely aware that federal taxes on dividends are relatively low, but what about state taxes? The good news is that not all states tax dividends, but it's essential to know which ones do and how they impact your tax bill.

Some states, like California, New York, and New Jersey, do tax dividends, while others, like Texas, Florida, and Washington, do not. The tax rates vary by state, with some charging a flat rate and others using a progressive tax system.

Understanding how state taxes on dividends work is crucial to making informed investment decisions. For example, if you live in a state that taxes dividends, you may want to consider investing in tax-efficient funds or exploring other investment options.

You'll only pay state taxes on dividends if you're a resident of the state where the dividend-paying company is incorporated.

Some states don't tax certain types of dividends, such as qualified dividends.

You can check your state's tax laws to see if they exempt qualified dividends from state taxation.

If you're a non-resident, you may still be subject to state taxes on dividends if you have a significant presence in the state.

You'll need to report your dividend income on your state tax return, just like you do on your federal tax return.

You pay taxes on dividends, but the tax rate depends on the type of dividend and your taxable income. Qualified dividends are taxed at a lower rate, while ordinary dividends are taxed at your ordinary income tax rate.

To qualify for the lower tax rate, you must hold the stock for more than 60 days within a 121-day period that begins 60 days before the ex-dividend date. If you don't meet this requirement, the dividend is considered ordinary and is taxed at your top personal tax rate.

The tax rate on qualified dividends is 0%, 15%, or 20%, depending on your taxable income and filing status. If your taxable income falls into one of the three lowest federal income tax brackets, you won't owe any income tax on qualified dividends.

If your taxable income falls into the three lowest U.S. federal income tax brackets, you won't owe any income tax on dividends earned. This applies to single filers with taxable income of $44,625 or less in 2023, and $47,025 or less in 2024.

The tax brackets increase to $89,250 or less for married couples filing jointly in 2023, and $94,050 or less in 2024. If you're in one of these lower tax brackets, you'll get to keep more of your dividend earnings.

Some types of events, like a return of capital, pay a dividend-like income that's not taxable. This can increase your future taxes, though, since your capital gain on the stock is increased by the amount of the dividend you received.

Here's an example: if you pay $20 for a single share and the company sends you a $0.50 dividend payment classified as a return of capital, your cost basis decreases to $19.50. If you sell the share in the future for a profit, that's an extra $0.50 that's subject to capital gains taxes.

Taxable income is just one factor that determines how much tax you owe on dividends. We'll cover more of the details in the next section.

Your online trading platform or broker will break down the qualified and ordinary dividends paid in separate boxes on IRS Form 1099-DIV.

Ordinary dividends are reported in Box 1a, while qualified dividends are reported in Box 1b.

This information helps investors determine the tax implications of their dividend income.

Investors should carefully review their Form 1099-DIV to ensure accurate reporting of qualified and ordinary dividends.

You'll receive a Form 1099-DIV from your broker or any entity that sent you at least $10 in dividends and other distributions. This form indicates what you were paid and whether the dividends were qualified or nonqualified.

To report dividend income on your taxes, you'll use the information from your Form 1099-DIV to fill out your tax return. You might also need to fill out a Schedule B if you received more than $1,500 in dividends for the year.

Even if you didn't receive a dividend in cash, you still need to report it. This includes dividends from investments you sold during the year.

Here's a step-by-step guide to reporting dividend income:

You can reduce your tax bill on dividends by holding them in a tax-deferred account, such as a Roth IRA or 401(k). This way, you won't owe taxes on the dividends until you withdraw the funds.

If you're in one of the three lowest federal income tax brackets, you won't pay taxes on qualified dividends. Qualified dividends must meet specific requirements, including being paid by a U.S. corporation or a foreign corporation listed on a major U.S. stock exchange, and being held for more than 60 days within a 121-day period.

To qualify for the lower tax rate, you must own the stock for at least 60 days within the 121-day period. This mandatory holding period prevents traders from earning tax-advantaged income on stocks that they hold for only a few days.

Here's a summary of the tax rates for qualified dividends in 2023:

Tax season can be overwhelming, but there are ways to reduce your tax bill. If you have taxable earnings in one of the three lowest federal income tax brackets and receive qualified dividends, you won't pay tax on those dividends.

You can also avoid paying taxes on dividends if they're earned in a tax-deferred account, such as a retirement account like a Roth IRA or 401(k), or a college savings plan like a 529 plan or Coverdell ESA. Keep in mind that certain pass-through entities, like master limited partnerships, can create tax obligations even for retirement accounts in some situations.

To minimize your tax bill, it's essential to know the difference between qualified and ordinary dividends. Qualified dividends are taxed at a lower rate, typically 20% for tax year 2024, depending on your taxable income. Ordinary dividends, on the other hand, are taxed at standard income tax rates.

Here's a breakdown of the tax rates for qualified dividends in 2023, depending on your taxable income and filing status:

To qualify for the lower tax rate on qualified dividends, the dividend must meet two main criteria: the dividend must be paid by a U.S. corporation or a foreign corporation listed on a major U.S. stock exchange, and you must have owned the stock for more than 60 days within a 121-day holding period.

Income retains its character as it passes through to the S corporation shareholders. If an S corporation allocates income to you, the character of that income matters, meaning you pay the ordinary income tax rates on ordinary income, but the lower preferential tax rates on long-term capital gains or qualified dividends.

For example, if you receive $125,000 of income from an S corporation, you pay ordinary income tax rates on the first $50,000, and then the preferential tax rates on the $50,000 of long-term capital gains and the $25,000 of qualified dividends.

The 3.8% net investment income tax, also known as the Obamacare tax, never hits the ordinary income that flows out of an S corporation if the shareholder is actively involved in the business.

Here's a breakdown of how this rule works:

If you're active in the business, you won't pay the 3.8% Obamacare tax on the $50,000 of ordinary business profit, but you might pay it on the long-term capital gains and dividends.

Dividend tax rates can be complex, but understanding the basics can help you navigate the process. The tax rate on qualified dividends is 0%, 15%, or 20%, depending on taxable income and filing status.

You'll receive a Form 1099-DIV from your broker or entity that sent you at least $10 in dividends and other distributions. This form indicates what you were paid and whether the dividends were qualified or nonqualified.

To determine owed tax on stock dividends, consider three factors: the type of investment account, the type of dividend, and your taxable income. Qualified dividends are eligible for a lower tax rate, while ordinary or nonqualified dividends get taxed at the investor's ordinary income tax rate.

Here's a summary of when you won't pay tax on dividends:

Qualified dividends must meet two main criteria: the dividend is paid by a U.S. corporation or a foreign corporation listed on a major U.S. stock exchange, and you owned the stock for more than 60 days within a specific 121-day holding period.

The tax rates for qualified dividends depend on your taxable income and filing status. Here are the current tax rates for qualified dividends in 2023:

Ordinary dividends, on the other hand, are taxed at the same rate as short-term capital gains: the top personal tax rate you pay. To find your top tax rate, find the bracket with your adjusted gross income on the charts below.