If I'm buying dividend fund ETFs and planning to live off on dividends with no other earned income, are the dividends distributed taxed as capital gains? If so, what is the current tax rate for singles? If not, how are dividends distributed taxed? Thank you.
Ordinary dividends are taxed at ordinary income tax rates: 10% - 37% brackets.
Qualified dividends (most dividends issued by large-cap US companies and dividends issued by ETFs subject to holding period requirements) are taxed at capital gains rates: 0% - 20% brackets.
Current brackets for single filers are 0% for $0 - $44,625, 15% for $44,626 - $492,300, and 20% above $492,300. These are based on taxable income, so account for any deductions.
Both qualified and ordinary dividends are subject to the net investment income tax (NIIT), which adds 3.8% to investment income for incomes above $200k single / $250k MFJ. NIIT is based on modified AGI and not taxable income.
Most states don't have a separate qualified dividends/capital gains rate, but check yours to be sure.
Example: if you have $50,000 in qualified dividends in 2023 with no other income or deductions, file single and take the standard deduction ($13,850 in 2023), your taxable income is $36,150. You'll pay 0% in federal taxes.
Example: if you have $100,000 in qualified dividends in 2023 with no other income or deductions, file single and take the standard deduction, your taxable income is $86,150. You'll pay 0% on the first $44,625 and 15% from $44,626 to $86,150.
Dividends are taxed as dividends, even from ETFs, but ETFs can also distribute capital gains depending on their structure. Dividends can also be qualified (lower tax rate) or unqualified depending on their source and how long you've held the ETF (you have to hold an ETF for 60 days around the ex-div date for the dividends to be qualified).
Qualified dividends are taxed at anywhere from 0% to 20% depending on your tax bracket. Unqualified dividends are taxed as regular income.
Note that dividends are cash flow but not not "income". The value of an ETF is reduced by the amount of its dividend, just like a single stock. If the stocks within the fund do not grow, the fund would shrink in value over time as it pays dividends.