Here’s How To Earn Tax-Free Dividends In 2022 | personal finance

(Charlene Rhinehart, CPA)

Christmas could come a little earlier this year if you start putting your money in the right places. Every time you put money into the stock market, you have the opportunity to unlock a variety of investment opportunities, such as investing in dividend stocks. These investments can help you earn a recurring stream of income without selling any of your stock.

If you think that’s exciting, wait until you learn about the possibilities for tax-free income. It may sound too good to be true, but it is possible if you qualify.

We’ll dive into how dividends work and determine if you qualify to receive tax-free dividends this year. If not now, this opportunity can really come in handy if you decide to take a gap year or head toward retirement.

Image source: Getty Images.

Enter the world of dividends

If you want to give life to your investment portfolioinvest in dividend stocks can do the trick. With dividends, you don’t have to wait until the stock goes from one price to a higher price to start receiving benefits. You can see the fruits of your investments sooner, possibly in 90 days or less, when you invest in stocks that pay dividends to investors.

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Is that how it works. When a business makes a profit, it has a variety of ways it can allocate funds. (Think of all the different ways you can allocate your funds when you get your paycheck.) A company may choose to reinvest in the company to accelerate growth initiatives or give a portion of the profits to investors in the form of dividends each month or quarter. . Some companies do both, and those stocks can help you enjoy the benefits of capital appreciation and dividend income.

Qualified dividends can put you in the 0% tax bracket

Earning extra money from your favorite companies is probably every income investor’s dream. But you have to be careful with taxes. Your dividends will not receive special tax treatment unless they are considered qualified dividends.

Here’s the 411 on how to get qualified dividends:

  • They are paid by a US corporation.
  • Qualified foreign corporations may distribute qualified dividends if meet certain requirements.
  • It has to be considered a regular dividend. Capital gains distributions will not count.

As an investor, you must hold your shares for a certain period of time to qualify for the special tax rates. The stock must be in your portfolio for more than 60 days during a 121-day period. The clock starts 60 days before the ex-dividend date.

If your additional income meets the definition of a qualified dividend, you’ll gain access to the qualified dividend tax rates shown below. You will note that you will not have to pay any tax on the dividends if your income is not more than $41,675 as a single taxpayer. That number increases to $83,350 if you’re married filing jointly. If you’re taking a gap year or have lower income this year, you may be in line to enjoy tax-free dividends this year.

2022 Qualified Dividend Tax Rates

For single taxpayers with taxable income of…

For married joint filers with taxable income of…

For Heads of Household with Taxable Income of…

…This is the Qualified Dividend Tax Rate

$0 to $41,675

$0 to $83,350

$0 to $55,800

0%

$41,676 to $459,750

$83,351 to $517,200

$55,801 to $488,500

fifteen%

More than $459,750

More than $517,200

More than $488,500

twenty%

Data source: IRS. Table by Author.

Earn tax-free dividends in your retirement account

If you don’t fall below the threshold to earn tax-free dividends in a taxable brokerage account, do not worry. There is still a way to walk away with tax-free income every month in retirement if you have a Roth IRA (individual retirement account). Roth IRAs allow you to contribute after-tax dollars now in exchange for tax-free income after you’ve checked the requirements box.

Here’s the catch: you have to wait until you’re 59 1/2 and you’ve signed up for the five year rule to access your dividends tax-free. So if you haven’t reached the minimum age, this is a great time to build your portfolio so you can have a waterfall of income at your disposal later on. make sure contribute all you can for you Roth IRA — if you qualify — so you can invest in more assets that pay a steady stream of income.

Dividend Stocks Can Provide the Best of Both Worlds

If you’re ready to unwrap the gift that keeps on giving, dividend stocks are something to consider. Your shares will have the opportunity to benefit from capital appreciation while earning recurring income for holding the shares. The best part is that you can reduce your taxes through qualified dividends or skip taxes altogether by hosting dividend shares in a Roth IRA.

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