Here’s How to Earn Tax-Free Dividends in 2022

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

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’s possible if you meet the requirements.

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

Image source: Getty Images.

Entering the world of dividends

If you’re looking to spice up your investment portfolio, investing in dividend stocks may 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 earlier — possibly in 90 days or less — when you invest in stocks that pay out dividends to investors.

Here’s how it works. When a company earns profits, they have a variety of ways they can allocate funds. (Think about the different ways you can allocate your funds when you get your paycheck.) A company can choose to reinvest back into the company to accelerate growth initiatives or give a portion of the profits to investors in the form of dividends every 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 get you to the 0% tax bracket

Earning extra money from your favorite companies is probably every income-investor’s dream. But you have to be careful when it comes to taxes. Your dividends won’t get special tax treatment unless they’re considered qualified dividends.

Here’s the 411 on getting qualified dividends:

They’re paid by a U.S. corporation.
Qualified foreign corporations can dole out qualified dividends if they meet certain requirements.
It has to be considered a regular dividend. Capital-gains distributions won’t count.

As an investor, you must hold your stock 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 extra income meets the definition of a qualified dividend, you’ll gain access to the qualified dividends tax rates shown below. You’ll notice that you won’t have to pay any taxes at all on dividends if your income doesn’t exceed $41,675 as a single filer. That number jumps to $83,350 if you’re married filing jointly. If you’re taking a sabbatical 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 Filers With Taxable Income of…

For Married Joint Filers With Taxable Income of…

For Heads of Households With Taxable Income of…

…This Is the Qualified Dividends 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

15%

Over $459,750

Over $517,200

Over $488,500

20%

Data Source: IRS. Table by Author.

Earn tax-free dividends in your retirement account

If you don’t fall under the threshold to earn tax-free dividends in a taxable brokerage account, don’t sweat it. There’s 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 box on the requirements.

Here’s the catch: You have to wait until you’re 59 1/2 and signed off on the five-year rule to access your dividends tax-free. So if you haven’t hit the minimum age, this is a good time to build up your portfolio so you can have a waterfall of income at your disposal later. Make sure you contribute as much as you can to your Roth IRA — if you qualify — so that 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 stocks will have a chance to benefit from capital appreciation while you get recurring income for holding on to the stock. The best part is that you can reduce your taxes through qualified dividends or skip taxes altogether by housing dividend stocks in a Roth IRA.

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