Interest dividends on state or municipal bonds are generally not subject to taxes at the federal income tax level, unless they are subject to the Alternative Minimum Tax (AMT). This income is generally reported in box 12 of Form 1099-DIV. Most states tax personal dividend income as ordinary income. Therefore, states with high income tax rates have the highest taxes on personal dividends.
The tax rate on qualifying dividends is 0%, 15%, or 20%, depending on your taxable income and tax status. The tax rate on unqualified dividends is the same as that of your regular income tax bracket. In both cases, people in the higher tax brackets pay a higher dividend tax rate. People in these states who are victims of the Alternative Minimum Tax do not receive any incremental benefits from the deduction.
Qualified dividends may be taxed at a rate of up to 20%, and the taxpayer may need to complete additional tax lists to support income. You can avoid paying taxes on your capital gains by deducting your losses, seeking other tax deductions, or donating shares to charities. My data comes from a tabulation from the Tax Foundation, an organization that closely monitors tax collectors. The marginal tax rate is the amount of additional taxes paid for each additional dollar earned as income.
While the federal tax rate on dividends isn't usually that bad, about half the rate that would be paid for interest or wages, most states don't reduce dividend exemptions. The United States currently has one of the highest tax burdens on personal dividend income in the OECD. Owning domestic investments that pay dividends could protect dividends from taxes or defer taxes on them. The maximum federal rate on personal dividend income is 23.8 percent (the maximum marginal tax rate of 20 percent plus a net investment tax of 3.8 percent to fund the Affordable Care Act).
In addition, the lowest level of the qualifying dividend tax table evaluates a 0% tax for people with lower incomes. The final tax rate that a taxpayer pays on dividends depends on the taxpayer's taxable income (and the associated marginal tax rate), in addition to the type of dividend received. Californians face the highest marginal tax rate on personal dividends in the United States, at 33 percent, followed by taxpayers in New York (31.5 percent) and Hawaii (31.6 percent).
