How does qualified dividends reduce my tax?

Question

If qualified dividends is taxed at a lower tax bracket (15%), then why don't I add this 15% tax amount to my total tax? IRS does not calculate it that way. Can someone please explain to me how this is calculated.

Answer 1

Income taxes are assessed on brackets of income. The first bracket is 10%, then 15%, then 25% and then higher. The brackets depend on the filing status.

When a taxpayer has qualified dividends, if the taxpayer is still in the 10% or 15% bracket, the dividends are taxed at 5% and this tax is added to the tax on the rest of the income.

If the taxpayer is in a bracket higher than 15%, then the qualified dividends are taxed at 15%, and this amount is added to the tax on the rest of the income.

Because of the way tax on qualified dividends is figured, it cannot be in a table. A worksheet is used. The easiest way to handle it is with a software program or preparer.

Answer 2

Qualified Dividends Worksheet

Answer 3

If your income is low enough, you pay only 5% on qualified dividends. Since I use Turbo Tax, I don't do the calculations myself, but there is a work sheet. Glancing at the work sheet, it appears to works this way. There is an upper limit to the 15% bracket, 30,650 if single, for example. If your taxable income is $35000, of which $7000 is qualified dividends, the worksheet basically calculates the tax on $28000 in the regular way, ordinary income. The next $2650 in income is qualified dividends taxed at 5%. The remaining $4350 in qualified dividends (income over 30,650) is then taxed at 15%.

The idea is that if you have low income, so that your marginal rate (your "tax bracket"), the rate on the next dollar of ordinary income you earn, is 10% or 15%, you don't pay 15% on the dividends, just 5%, so low income people get a real break on dividends too.

Answer 4

The qualified dividends are taxed similar to long-term capital gains. These dividends are taxed at a lower rate (5 or 15% depending on your tax bracket). For example, if you are in the 25% tax bracket, your qualified dividends are taxed at 15% while your wages and other income would be taxed at 25%

Answer 5

first when a taxpayer receives a 1099DIV from an investment company reporting "qualified dividends" to the taxpayer, this does not automatically "qualify" the dividends for the lower rates automatically. the taxpayer must first qualify the investment themselves before being eligible for the lower rates (this has to do with the actual holding period of the underlying security by the taxpayer)once the dividends are qualified and separated from the non-qualifing ones these figures are then reported on your 1040 (and schedule b, if required)and then transferred to a capital gains tax worksheet. the qualified dividends (and long term capital gains)received by a taxpayer and qualified for the lower tax rates are broken out and separated from all other income not eligible for the lower rates.(this is done on the schedule b, if required for qualified dividends and schedule d for long term capital gains) the tax calculation and in effect the discount on this preferential income is calculated and accounted for on what is called a capital gains tax worksheet.(this worksheet is included with your schedule d instructions) and should be completed (but not required to be included with your annual filing)someone who is desirable for the lower rates for this type of income would calculate their total tax due the IRS on this worksheet and the tax calculated is then transferred to the form 1040. The rates are 5% on qualified dividends and long term capital gains if your margin tax rate is 15% or 15% if your marginal tax rate is 25% or more. marginal tax rate refers to the percentage of tax you pay on your last dollar earned.the taxpayer who qualifies for the lower qd/ltcg rates should always complete the worksheet to effect the lowest legal tax possible allowed under the law and regulations. I hope this answered your question