How to Avoid Paying Taxes on Dividend Income

Avoiding taxes on dividend income is a strategy that requires some planning, but it's definitely doable.

You can avoid paying taxes on dividend income by investing in tax-efficient vehicles, such as tax-loss harvesting and tax-deferred accounts.

Investing in tax-efficient vehicles can help minimize taxes owed on dividend income.

Dividends can be a great way to earn income from your investments, but they can also come with a tax bill. Fortunately, there are ways to minimize or even avoid paying taxes on dividends. To start, it's essential to understand how dividends are taxed.

Dividends are reported to you on Form 1099-DIV, but you still need to include all taxable dividends on your tax return, regardless of whether you receive this form.

To qualify for special tax treatment, your stock must be held for more than 60 days during the 121 days beginning 60 days before the ex-dividend date. This is known as a qualified dividend.

Qualified dividends are taxed at one of three long-term capital gains tax rates: 0%, 15%, or 20%. The tax rate depends on your filing status and taxable income. For example, in 2025, single filers with a taxable income below $48,350 pay 0% tax on qualified dividends.

Here are the tax rates for qualified dividends in 2025:

By understanding how qualified dividends work, you can potentially save on taxes.

You can pay less income tax on certain dividends by taking advantage of special tax treatment under the current tax code.

Taxpayers might be able to stay in lower tax brackets by carefully managing their investments and dividend income.

A qualified dividend is taxed at one of three long-term capital gains tax rates instead of the usually higher tax rate applied to an individual's ordinary income.

To qualify for this lower tax rate, the stock must be held for more than 60 days during the 121 days beginning 60 days before the ex-dividend date.

A dividend reinvestment plan (DRIP) can automatically use the proceeds generated from dividend stocks to purchase more shares, but this doesn't exempt you from paying taxes on dividends.

Taxpayers can try to stay in lower tax brackets or invest in tax-exempt securities to avoid paying taxes on dividends.

Here are some tax strategies to consider:

Form 1099-DIV is the form financial institutions use to report dividends and certain distributions to you and the IRS.

You'll receive this form if your total dividends and distributions for a year exceed $10. This form includes information about the payer, recipient, type, and amount of dividends paid, as well as any federal or state income taxes withheld.

To report your dividends on your tax return and pay the applicable taxes, you'll need to include the amounts on Form 1040 and fill out the related line items on Schedule B if required.

TurboTax can help fill out the proper forms for you by asking questions about dividends you receive throughout the tax year.

Qualified dividends are taxed at one of three long-term capital gains tax rates instead of the usually higher tax rate applied to an individual's ordinary income. As of 2025, these tax rates are 0%, 15%, and 20%.

To qualify for this lower tax rate, the stock must be held for more than 60 days during the 121 days beginning 60 days before the ex-dividend date. This is a critical factor to consider, as holding the stock for less time may disqualify it from receiving this preferential tax treatment.

Qualified dividends are paid by a U.S. company, a company in U.S. possession, a foreign company residing in a country that is eligible for benefits under a U.S. tax treaty, or a foreign company whose stock can be easily traded on a major U.S. stock market.

Here are the main characteristics of qualified and unqualified dividends:

Ordinary dividends, on the other hand, do not meet the qualified dividend requirements and are taxed as short-term capital gains. This means they are taxed as ordinary income, at the individual's income tax rate.

There are two main types of dividends: qualified and unqualified. A qualified dividend is taxed at a lower rate than an unqualified dividend.

To qualify for the lower tax rate, a stock must be held for more than 60 days during the 121 days beginning 60 days before the ex-dividend date. This is a pretty specific rule, but it's worth following if you want to save on taxes.

A dividend reinvestment plan (DRIP) can help you automatically purchase more shares with the proceeds from your dividend stocks. This can be a great way to grow your investment over time.

There are four types of companies that can issue qualified dividends: a U.S. company, a company in U.S. possession, a foreign company residing in a country that's eligible for benefits under a U.S. tax treaty, and a foreign company whose stock can be easily traded on a major U.S. stock market.

Here are the tax rates for qualified dividends:

Note that these tax rates are subject to change, but as of 2025, they're the current rates.

A qualified dividend is taxed at one of three long-term capital gains tax rates instead of the usually higher tax rate applied to an individual's ordinary income. As of 2025, these tax rates are 0%, 15%, and 20%.

To qualify for this lower tax rate, the stock must be held for more than 60 days during the 121 days beginning 60 days before the ex-dividend date. For preferred stock, the stock must be held more than 90 days during the 181 days starting 90 days before the ex-dividend date if the dividends are due in a period longer than 366 days.

A qualified dividend must be paid by one of the following: a U.S. company, a company in U.S. possession, a foreign company residing in a country that is eligible for benefits under a U.S. tax treaty, or a foreign company whose stock can be easily traded on a major U.S. stock market.

Here are the types of companies that can issue qualified dividends:

Note that a dividend reinvestment plan (DRIP) automatically uses the proceeds generated from dividend stocks to purchase more shares.

Short-term capital gains taxes apply to profits on assets held for one year or less, and are taxed at your ordinary income tax rate, which can range from 10% to 37% depending on your taxable income.

Long-term capital gains taxes, on the other hand, apply to profits from assets held for more than one year and are taxed at a special rate of either 0%, 15%, or 20% depending on your taxable income.

To give you a better idea, here are the tax rates for qualified dividends for tax years 2024 and 2025:

As you can see, the tax rates for qualified dividends vary depending on your filing status and taxable income.

To avoid paying taxes on dividends, you can try to stay in lower tax brackets. This means keeping your taxable income below certain thresholds.

One strategy is to invest in tax-exempt securities or leverage tax-exempt accounts, such as 401(k) or IRA, to defer taxes.

If your taxable income falls below $47,025 (Single or Married Filing Separately), $63,000 (Head of Household), or $94,050 (Married Filing Jointly or Qualifying Surviving Spouse), your "qualified" dividends may be taxed at 0%.

Here's a breakdown of the qualified dividend tax rates for 2024:

By understanding these tax rates and thresholds, you can make informed decisions about your investments and minimize your tax liability.

Holding onto taxable assets for at least one year can make a big difference in your tax liability. This is because long-term capital gains are taxed at a lower rate than short-term gains.

The maximum tax rate on ordinary income is usually higher than the maximum tax rate on capital gains. This is why it's often a good idea to hold onto taxable assets for more than a year to benefit from the lower long-term capital gains tax rate.

For example, let's say you have a taxable income of $200,000 and a taxable capital gain of $1,000. If you've held the asset for more than one year, you'll pay a long-term capital gains tax rate of 15%, resulting in a $150 tax liability. This is significantly lower than the tax liability of $320 you'd pay if you've held the asset for one year or less.

Here's a comparison of the tax rates:

By holding onto taxable assets for at least one year, you can save money on taxes and keep more of your hard-earned cash.

Donating long-term investments to charity can provide a tax benefit. If you itemize, you'll receive a charitable donation tax deduction for the fair market value of the investment on the date of the donation.

Investments that have appreciated in value can be donated to a qualified charity without incurring capital gains tax. This can be a smart way to support a cause you care about while also reducing your tax liability.

Charitable donations can be made in various forms, including stocks, bonds, and other securities. It's essential to work with a qualified tax professional to ensure you're taking advantage of all available tax benefits.

Donating appreciated investments to charity can be a win-win, allowing you to support a good cause while also reducing your tax bill.

Tax avoidance is a smart way to manage your finances, and it's not just for the wealthy. If your taxable income falls below $47,025, you may be able to pay no income tax on your qualified dividends.

You can also try to stay in lower tax brackets, which can help reduce your tax liability. This can be achieved by investing in tax-exempt securities or leveraging tax-exempt accounts.

Investors may also consider investing in tax-deferred accounts to defer taxes. This can be a great way to save for retirement while minimizing your tax burden.

Here's a breakdown of the qualified dividend tax rates for 2024:

By understanding these tax rates, you can make informed investment decisions and potentially reduce your tax liability.

Interest on state or municipal bonds is exempt from federal income tax, unless you're subject to the Alternative Minimum Tax (AMT).

This income is typically reported in box 12 of Form 1099-DIV.

The interest is usually distributed through an interest dividend by mutual funds or ETFs that hold these bonds.

This means you won't have to pay federal income tax on the interest, but you may still be subject to state and local taxes.

Mutual funds and ETFs may have state or municipal bonds as holdings, which can provide tax benefits.

These bonds pay interest that's often exempt from federal income tax, making them an attractive option for investors.

What Are Qualified and Ordinary Dividends?

Qualified dividends are taxed at the long-term capital gains rate. This is a lower tax rate compared to ordinary income.

Dividends can be considered qualified or ordinary. The tax treatment of these dividends depends on the type.

Qualified dividends are taxed at 0% if your taxable income falls below $47,025 (Single or Married Filing Separately), $63,000 (Head of Household), or $94,050 (Married Filing Jointly or Qualifying Surviving Spouse).

Ordinary dividends, on the other hand, are taxed at the ordinary income rate. This means they're subject to the standard income tax brackets for tax year 2024.

Here's a breakdown of the qualified dividend tax rates for tax year 2024:

To avoid paying taxes on dividends, you need to understand the tax brackets for qualified dividends. For tax year 2024, qualified dividends are taxed at 0% if your taxable income falls below $47,025 for singles or married filing separately.

The tax rate for qualified dividends increases to 15% if your taxable income exceeds those thresholds. However, if you're married filing jointly or a qualifying surviving spouse, you'll pay 15% if your taxable income exceeds $94,050.

To qualify for the 0% tax rate, your taxable income must be below the specified thresholds. If you're single, that's $47,025. If you're married filing jointly or a qualifying surviving spouse, that's $94,050.

Here's a quick rundown of the tax brackets for qualified dividends in tax year 2024:

By understanding these tax brackets, you can make informed decisions about your investments and minimize your tax liability.