The Tax Efficiency Of Dividends

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Today we’ll explore the tax efficiency of dividend income.

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The Tax Efficiency Of Dividends

Highlights

• Dividend income is some of the most tax-friendly income you can make.

• Married people can generate up to $83,351 in dividends tax-free.

• Taking advantage of a Roth IRA can help grow money tax-free.

In the United States, income is taxed anywhere from 10% to 37%. If your salary falls within the range of $41,776-$89,075 (as most salaries in the U.S. do) you'll be taxed at 22%. I don't know about you but I like holding on to as much of the money as I can after I've worked hard to get it.

When you talk to people about how much money they make at work, they'll tell you they make a certain amount of money before taxes. How good would it be to just make money and be able to keep nearly all of it?

With dividends, you can.

Today we'll explore why dividend income is extremely tax efficient and how you can use the tax code to your advantage to keep the vast majority of your hard-earned money.

Depending on how much dividend income you have, you might not have to pay taxes on your dividend income at all.

Let's jump in!

2022 Dividend Tax Brackets

If You're Single...

Single people can generate up to $41,676 in dividend income before being taxed.

If you make $41,676 through $459,750 you’re only taxed at 15% compared to the 22% that most active income is taxed at.

If you surpass $459,750 in dividend income, you’ll be taxed at a rate of 20% which is still better than the average salary's tax rate.

If You're Married...

Married people can generate $83,351 in dividends tax-free.

If you make $83,351 through $517,200 you’re only taxed at 15%.

Once you make more than $517,200, you’re taxed at 20%.

Dividends Can Alleviate Some Of Your Tax Burden

Taxes are one of the biggest expenses people have. There are over $1 trillion is paid in individual income taxes each year.

Dividend income is some of the most tax-friendly income you can make. By taking as much of your active income as you can and investing it, your income shifts from being reliant on you actively working to coming passively and tax efficient and you don’t have to be on your feet.

Dividend income can also be beneficial for retirement planning. Investing money into dividend-paying stocks can generate a steady income stream that can help supplement pension payments or Social Security benefits.

We'll explore my favorite retirement plan the Roth IRA next.

You Can Also Take Advantage Of A Roth IRA

A Roth IRA is a special individual retirement account (IRA) where you pay taxes on money going into your account, and then all future withdrawals are tax-free.

In a Roth IRA:

• Your money grows tax free

• You can withdraw contributions at any time

• You can withdraw $10k for a 1st time home purchase

• After 59.5 you can withdraw everything tax free

Starting in 2023 you can invest $6500 per year which amounts to $125/week. Not too much to ask in return for the enormous tax-free growth you could amass.

A maxed-out Roth IRA growing at 7% with a 3% dividend yield for 30 years will amount to $1,058,126.44 and will yield $37,034.43 in dividend income.

Final Thoughts

Nobody likes taxes but we all have to pay them.

Fortunately, we have some control over the way we make our income, and some ways of income are taxed at a lot more favorable rate than others. Dividends can help mitigate the money you'll lose to taxes from your day job.

With the ability to bring home $41,676 each year from dividends absolutely tax-free, it's clear that income from dividends is taxed at a very favorable rate.

Personally, I'm working towards turning as much of my active income earned from my job into passive income earned from dividends. Not only will the dividend income be taxed more favorably, but it will also come in without me having to work on my feet.

Win-win.

Some Cool Tax Loopholes

Don't worry, I pay my fair share of taxes.

However, there is a difference between tax avoidance and tax evasion. Tax evasion is illegal and will land you in prison sooner or later.

Tax avoidance on the other hand is completely legal.

There are ways to legally avoid paying taxes on certain things. After listening to an episode by NPR's Planet Money covering tax loopholes, I've been inspired to share some of my favorite tax loopholes.

Enjoy!

• You can write off the cost of cat food as a business expense if you own a junkyard

• The IRS allows you to rent your home for up to 15 days tax-free. This is especially useful for people who rent their houses out for the Master's Golf Tournament. One person made $10,000 for renting their house out for 8 days

• If you are recognized by the Alaskan Whaling Commission as a whaling captain, your profits shall be treated as a charitable donation for tax purposes

Check out the podcast Planet Money below:

Links & Memes

Sam Bankman-Fried, founder of the now defunct crypto exchange FTX was recently arrested. What would you name this album?

I’m a huge fan of geography and terrible dad jokes. Here’s a perfect intersection of both:

This is a sick breakdown of Christopher Nolan’s use of real effects in movies instead of CGI:

If you’ve been reading my newsletter for the last few weeks you know I’ve been obsessing over the World Cup. Here’s an absolutely ELECTRIC call of a goal by an announcer from Telemundo:

Could you imagine how cool this would be?

The Dose Of Dividends Podcast Is Available Now!

Are you looking to get smarter with your investments?

Check out the Dose of Dividends Podcast!

In this podcast, I'll be interviewing experienced investors across all asset classes, as well as providing in-depth breakdowns of dividend stocks I like right now. You'll also hear real stories from people who are on the path to financial freedom—and some tips from them on how you can do the same!

In my latest episode, I sat down with the CEO of Wide Moat Research Brad Thomas. We discussed

• Why REITs will dominate in the age of e-commerce

• Why malls aren’t dead

• Which REITs will outperform

• The benefits of owning REITs

Listen wherever you get your podcasts👇

Dose of Dividends | RSS.com — rss.com

Don’t forget to check out my website full of awesome free resources to jumpstart your investing! 👇

Dr. Dividend | Linktree — linktr.ee

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Disclosure: The contents of this newsletter are in no way intended to provide financial advice. Dr. Dividend may have positions in any of the stocks mentioned and this newsletter is in no way intended to promote buying or selling of any security. Please do your own research before investing in anything.