Question

Angelina received $20,000 of qualified dividends this year.

Under what circumstances would all $20,000 of the dividends be taxed at the same rate?

Under what circumstances would the $20,000 of dividends NOT be taxed at the same rate?

Answer 1

Angelina received $20,000 of qualified dividends this year.

Under what circumstances would all $20,000 of the dividends be taxed at the same rate?

Under what circumstances would the $20,000 of dividends NOT be taxed at the same rate?

Answer:

The entire qualified dividend will be taxed at the same rate in three scenarios. First, the dividend will all be taxed at 15% if (a) Angelina’s ordinary income exceeds the threshold for the 15% marginal tax bracket (it is taxed at a rate higher than 15%) and (b) her total taxable income (including the $10,000 qualified dividend) is equal to or less than the threshold for the 39.6% tax bracket. Second, the entire dividend will be taxed at 0% as long as Angelina’s ordinary income plus her $10,000 qualified dividend does not exceed the threshold for the 15% marginal tax bracket. Third, the entire dividend will be taxed at 20% as long as Angelina’s ordinary income exceeds the threshold for the 39.6% marginal tax bracket.

The qualified dividend will be taxed at different rates if the amount of Angelina’s ordinary income is below the 15% marginal tax bracket, but the qualified dividend causes her total taxable income to exceed the 15% marginal tax bracket threshold. In this scenario, her qualified dividends will be taxed at 0% to the extent they would have been taxed at 15% as ordinary income, and the remainder would be taxed at 15%. Likewise, the qualified dividend will be taxed at different rates if the amount of Angelina’s ordinary income is below the 39.6% marginal tax bracket, but the qualified dividend causes her total taxable income to exceed the 39.6% marginal tax bracket threshold. In this scenario, her qualified dividends will be taxed at 15% to the extent they would have been taxed at 35% (or less) as ordinary income, and the remainder would be taxed at 20%.