How Do I Avoid Paying Taxes on Dividends? (2024)

How Do I Avoid Paying Taxes on Dividends? (1)

Dividends are payments that some companies make to shareholders to reward them for investing in them. Dividends can provide regular, predictable income to investors who also preserve the chance of profiting from price appreciation. Dividends can qualify for advantageous capital gains tax treatment if stocks are owned long enough. Avoiding all income taxes on dividends is more complicated, though. Options include owning dividend-paying stocks in a tax-advantaged retirement account or 529 plan. You can also avoid paying capital gains tax altogether on certain dividend-paying stocks if your income is low enough. A financial advisor can help you employ dividend investing in your portfolio.

Dividend Basics

Dividends are payments investors get from owning shares of some companies. Companies that are profitable may distribute some of their profits as cash payments or stock dividends as a way to reward shareholders for investing in the business. Dividend-paying stocks are popular alternatives to bonds for investors who want to generate passive income. Retirees often invest in dividends so they can pay their living expenses without having to sell stocks.

Like all income, dividends are subject to taxes. The tax rates depend on whether dividends are considered qualified or non-qualified. Ordinary or non-qualified dividends are paid by stocks that are owned for less than the required holding period. These dividends are taxed at an investor’s ordinary income tax rate. Qualified dividends, which are paid by stocks that are owned for at least the required holding period, are taxed as capital gains.

Capital gains rates are generally lower than ordinary income rates and fall into the rate bracket of 0%, 15% or 20%. Rates are based on the taxpayer’s income and most taxpayers are in the 15% capital gains bracket. As an example, an investor who earned $10,000 from qualified dividends typically would owe capital gains taxes of $1,500, reducing their after-tax gain to $8,500.

How to Avoid Taxes on Dividends

There are a few strategies for avoiding taxes on your dividends, depending on whether they’re qualified or ordinary dividends:

  • Roth retirement accounts: A Roth IRA is funded with after-tax money. Once a person reaches age59 ½, money can be withdrawn tax-free. So any dividends paid out by stocks owned in a Roth account would be free of taxes, as long as the dividends were withdrawn after age 59 ½ and at least five years after the account was opened.
  • Qualifying for zero capital gains tax: Capital gains taxes are graduated, with higher-income investors paying higher rates. Investors in the lowest income bracket owe zero capital gains taxes. Brackets change annually. For example, a married couple filing jointly with taxable income of $89,250 or less for the 2023 tax year would pay no capital gains tax on dividends. Strategies such as contributions to retirement accounts and health savings accounts (HSAs) may reduce your income below the zero-capital gains tax threshold. As a result, you wouldn’t owe any taxes on qualified dividends.
  • Education plans: Tax-advantaged 529 plans allow tax-free growth and withdrawals as long as the money is used to pay qualifying education expenses. So placing funds into a 529 plan and using the money to buy dividend-paying stocks will allow you to accumulate funds tax-free and also withdraw the money without owing taxes. However, this only works if the withdrawal amounts go for qualified education expenses such as tuition and books.
  • Other retirement accounts:Other retirement accounts, like traditional IRAsand 401(k)s can offer partial relief from income taxes. These accounts are funded with pre-tax money. An investor can deduct money contributed to a traditional account from their current taxable income. But unlike Roth accounts, withdrawals are taxed as ordinary income. Holding dividend-paying stocks in a traditional IRA or 401(k) won’t eliminate your tax liability, but it could reduce it.

Bottom Line

Investing in dividend-paying stocks can generate income while also preserving the potential for capital appreciation. Dividend income may be taxed at capital gains rates that are lower than tax rates on ordinary income as long as the shares are held for at least a year. You may be able to avoid all income taxes on dividends if your income is low enough to qualify for zero capital gains if you invest in a Roth retirement account or buy dividend stocks in a tax-advantaged education account.

Investing Tips

  • Consider checking with a financial advisor for suggestions about tax-efficient ways to generate income through dividend investing. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • To plan well for your financial future, you need to have some idea of how much your investments will be worth in the future. SmartAsset’s can help you estimate how much your portfolio could be worth. Provide the amount of money you’re starting with, the additional contributions you plan to make, your expected rate of return and how long you want to let the money grow. The calculator will then give you the future estimated value of your portfolio.

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How Do I Avoid Paying Taxes on Dividends? (2024)


How Do I Avoid Paying Taxes on Dividends? ›

You may be able to avoid all income taxes on dividends if your income is low enough to qualify for zero capital gains if you invest in a Roth retirement account or buy dividend stocks in a tax-advantaged education account.

How much dividend income is tax free? ›

Your “qualified” dividends may be taxed at 0% if your taxable income falls below $44,625 (if single or Married Filing Separately), $59,750 (if Head of Household), or $89,250 (if (Married Filing Jointly or qualifying widow/widower) (tax year 2023). Above those thresholds, the qualified dividend tax rate is 15%.

Is there a way to reinvest dividends without paying taxes? ›

Reinvested dividends may be treated in different ways, however. Qualified dividends get taxed as capital gains, while non-qualified dividends get taxed as ordinary income. You can avoid paying taxes on reinvested dividends in the year you earn them by holding dividend stocks in a tax-deferred retirement plan.

Where are dividends not taxed? ›

Nontaxable dividends are dividends from a mutual fund or some other regulated investment company that are not subject to taxes. These funds are often not taxed because they invest in municipal or other tax-exempt securities.

Do dividends count as income? ›

All dividends paid to shareholders must be included on their gross income, but qualified dividends will get more favorable tax treatment. A qualified dividend is taxed at the capital gains tax rate, while ordinary dividends are taxed at standard federal income tax rates.

Are reinvested dividends taxed twice? ›

Dividends are taxable regardless of whether you take them in cash or reinvest them in the mutual fund that pays them out. You incur the tax liability in the year in which the dividends are reinvested.

How do I avoid withholding tax on US dividend stocks? ›

Under the Treaty, there is a special exemption from U.S. withholding tax on interest and dividend income that you earn from U.S. investments through a trust set up exclusively for the purpose of providing retirement income. These trusts include RRSPs, RRIFs, LIRAs, LIFs, LRIFs and Prescribed RRIFs.

Is it better to reinvest dividends or take cash? ›

Your Money Could Lose Value Due To Inflation: Keeping your cash liquid will result in depreciation over time. Keeping the dividends reinvested instead allows your money to grow with the market over time.

What can offset dividend income? ›

If your losses are greater than your gains

Up to $3,000 in net losses can be used to offset your ordinary income (including income from dividends or interest). Note that you can also "carry forward" losses to future tax years.

At what age do you not pay capital gains? ›

Since the tax break for over 55s selling property was dropped in 1997, there is no capital gains tax exemption for seniors. This means right now, the law doesn't allow for any exemptions based on your age. Whether you're 65 or 95, seniors must pay capital gains tax where it's due.

Do I have to pay taxes on dividends less than $10? ›

The IRS does not require 1099 Forms in cases where the interest, dividends or short-term capital gain distributions are under $10. However, the IRS does require individuals to report these amounts under $10 on their tax returns.

Are dividends taxed when declared or paid? ›

Investors pay taxes on the dividend the year it is announced, not the year they are paid the dividend.

What is qualified dividend income? ›

Qualified dividends are generally dividends from shares in domestic corporations and certain qualified foreign corporations which you have held for at least a specified minimum period of time, known as a holding period.


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