Qualified Dividends impact on Ordinary Income Tax Bracket

Home Fairmark Forum Taxation of Investments Qualified Dividends impact on Ordinary Income Tax Bracket

  • This topic has 4 replies, 2 voices, and was last updated 1 month ago by Will.
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  • #74270
    Will
    Participant

    “Will capital gain or qualified dividend income push my other income into a higher tax bracket?
    No, the tax rates apply first to your “ordinary income” (income from sources other than long-term capital gains or qualified dividends) so these items that are taxed at special rates won’t push your other income into a higher tax bracket.”

    Your Tax Bracket

    How can this be? Qualified dividends are included in Ordinary dividends.

    “Line 3a
    Qualified Dividends

    Enter your total qualified dividends on
    line 3a. Qualified dividends are also included in the ordinary dividend total required to be shown on line 3b. Qualified dividends are eligible for a lower tax rate than other ordinary income. Generally, these dividends are shown in box 1b of Form(s) 1099-DIV. See Pub. 550 for the definition of qualified dividends if you received dividends not reported on Form 1099-DIV.”

    https://www.irs.gov/instructions/i1040gi#idm140658438130416

    #74271
    Kaye Thomas
    Moderator

    Here’s how it works. Both qualified dividends and long-term capital gain are included in adjusted gross income (line 11 of Form 1040) and taxable income (line 15). But when you have these items, your tax is figured by dividing your income into two categories. One part is taxed at rates for what we call ordinary income, and the other part is taxed at the special rates that apply to these dividends and capital gains. (This happens in either the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet.) Because the dividends and capital gains are subtracted from total taxable income before applying the rates for ordinary income, those items don’t push the ordinary income into a higher bracket.

    For example, suppose you have $80,000 of pension income and $400,000 of qualified dividend income. The amount of tax you’ll pay on the $80,000 of pension income will be the same as if you had zero dividend income. Tax on the dividend income is extra, but doesn’t change what you pay on the pension income.

    This is a bit of a simplification, because I’m ignoring the possibility of indirect effects. The dividend income could cause you to lose some other tax benefit, making a greater amount of the pension income taxable. The fact remains that the qualified dividend income itself doesn’t throw you into a higher tax bracket.

    #74274
    Will
    Participant

    “For example, suppose you have $80,000 of pension income and $400,000 of qualified dividend income. The amount of tax you’ll pay on the $80,000 of pension income will be the same as if you had zero pension income. Tax on the dividend income is extra, but doesn’t change what you pay on the pension income.”

    Sorry, I don’t understand this example.

    #74275
    Kaye Thomas
    Moderator

    Sorry, there was a typo. I intended to write, “the same as if you had zero dividend income.”

    #74390
    Will
    Participant

    Thank you

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