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This answer does not explicitly address the question of whether non-qualified or qualify dividends get taxed first, but am I correct that non-qualified dividends get taxed before qualified dividends do?

For example, suppose that in 2024 you're filing as single and you make $40,000 in taxable wages, $7,150 in non-qualified dividends, and $7,150 in qualified dividends.

A. If the non-qualified dividends get taxed first (which I believe is the case), then:

  1. You'd pay the 12% marginal ordinary income tax rate on the non-qualified dividends, so 12% * $7,150 = $858, and
  2. You'd pay the 15% marginal long-term capital gains tax rate on the qualified dividends, so 15% * $7,150 = $1,072.50, for a total tax of $858 + $1,072.50 = $1,930.50 on your dividends.

B. If qualified dividends get taxed first, then

  1. You'd pay no capital gains taxes on the first $7,025 of the qualified dividends, because they take you up to the top of the 0% marginal long-term capital gains tax,
  2. You'd pay the marginal long-term capital gains tax rate of 15% on the next $125 of qualified dividends, so 15% * $125 = $18.75, and
  3. You'd pay the 22% ordinary income marginal tax rate on the non-qualified dividends, so 22% * $7,150 = $1,573, for a total tax of $18.75 + $1,573 = $1,591.75 on your dividends.

(Note that the fact that non-qualified dividends get taxed first does not necessarily always raise your tax bill for your dividends. For example, if you made $90,000 in taxable wages, $10,525 in non-qualified dividends, and $10,525 in qualified dividends, then if the non-qualified dividends get taxed first you'd pay $2315.50 + $1578.75 = $3894.25 on your dividends, but if the qualified dividends were taxed first then you'd pay $1578.75 + $2,526 = $4,104.75 on your dividends.)

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  • 1
    By the way, qualified dividends (form 1040 line 3a) are part of ordinary dividends (form 1040 line 3b), just like how long-term capital gains are part of capital gains. It's just that they are considered separately when calculating the tax.
    – user102008
    Commented Jun 30 at 15:40
  • 2
    Following up on the previous comment, I think your intent here is to have $7,150 of qualified dividends and $14,300 of ordinary dividends. (Since otherwise all of your ordinary dividends are qualified dividends.) I am also assuming you want "$40,000 in taxable wages" to mean that your wages are $40,000 + your standard deduction (since otherwise the qualified dividends aren't taxed in any scenario). Is this correct?
    – d_b
    Commented Jun 30 at 20:09
  • @d_b As discussed at money.stackexchange.com/questions/150203/…, the usage of the term "ordinary dividends" is very inconsistent. But yes, I meant non-qualified dividends. For clarity, I've edited the question to replace the term "ordinary dividends" with "non-qualified dividends".
    – tparker
    Commented Jun 30 at 23:56
  • @d_b To your second question: no, by "$40,000 in taxable wages" I mean that your wages are $40,000 plus all of your deductions, whether standard or itemized. My understanding is that you cannot deduct qualified dividends from your income if you itemize your deductions.
    – tparker
    Commented Jun 30 at 23:56
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    @keshlam I think you missed the fact that OP has already subtracted deductions (not necessarily standard) from the 40000 'wages'; also last year's program doesn't have this year's brackets. tparker: you canot deduct qual div for either standard or itemized deductions -- they are neither exempt or an expense -- but they are subject to the preferred rates and brackets exactly the same in both cases; a different amount of itemized vs standard does change your 'leftover' ordinary-rate income. Commented Jul 3 at 4:00

3 Answers 3

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TLDR: Your option A is correct.

Using (few) needed bits from form 1040 and the computation specified by 2024 pub 505 worksheet 2-5 but putting the numbers at the left instead of the right (so it's MUCH easier to line them up):

54600 wages (40000 + standard deduction 14600 for nondependent single nonelderly/disabled)
14300 dividends (7150 qualified, 7150 unqualified)
68900 gross income and AGI (no QBI, no schedule 1 part 2 e.g. IRA, HSA, student loan interest ...)
14600 standard deduction 
54300 taxable income (line 1)
 7150 preferred-rate income (lines 2,4,9)
47150 non-preferred-rate income (line 10)
47025 preferred-0% end (line 11) (note not same as ordinary-12% end) 
47025 preferred-0% skipped by ordinary (line 12)
    0 preferred income in 0% bracket (line 15)
47150 lines 13a,13c,14 
 7150 lower of preferred or total (line 16) less line 15 (line 18)
 7150 preferred-15% limit (line 20 discarding line 19 less line 14 and 15 giving line 22)
 7150 preferred-15% amount (line 23)

The only applicable preferred-rate tax is 15% of line 23 = 1072.50 (line 24)
The ordinary-rate tax for 47150 on line 14 is 10% of the first 11600 then 12% of the rest = 5426.00 (line 37) 
Total is 6498.50 (line 38) (although most people use the dollar-rounding option making this 6499)
(If the ordinary-rate schedule applied to line 1 combined income were less it would be substituted, but it isn't.)

If no dividends (either kind) were present, ordinary-rate tax on 54600 wages 
minus 14600 standard deduction = 40000 taxable income would be 4568.

So the delta tax for the dividends (before rounding) is 1930.50 or 858+1072.50 

Also compare (my) In what order are Short Term Capital Losses applied when dealing with Municipal Bond Interest, Qualified Dividends, and Ordinary Income? which almost addresses this.

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  • Thank you! Really not sure what all the confusion is in the other answers.
    – tparker
    Commented Jul 4 at 0:43
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You think that the capital gains marginal brackets and ordinary income marginal brackets are not related to each other. It's a common misconception.

You also seem to think that qualified dividends are treated as capital gains, which is also another common misconception.

Take a look at the IRS Tax Topic 409, which discusses capital gains:

A capital gains rate of 0% applies if your taxable income is less than or equal to:

$44,625 for single and married filing separately;

Notice the highlighted part: it says your taxable income. I.e.: your total taxable income, not just capital gains. So the capital gains tax brackets depend on your total taxable income, all included. The order in which you sum it all up doesn't matter.

Qualified dividends are called that way because they're dividends (not capital gains!) that qualify for preferential tax treatment, and taxed at the same rate as capital gains.


For the practical demonstration of how this work follow the steps of the capital gains tax calculation worksheet for the form 1040:

  1. Calculate total taxable income (form 1040 line 10 in the example above, since it's for 2018)
  2. Calculate all income subject to capital gains rates (which is long term capital gains with some exceptions and qualified dividends)
  3. Iterate through capital gains brackets based on the amount calculated in step 1 until the amount calculated in step 2 is depleted, adding up the tax per bracket.
  4. In the end (on form 1040, after completing the worksheet), recalculate the total tax based on the regular marginal rates excluding the amounts calculated in step 2 from the amounts calculated in step 1, and add the tax calculated in step 3 to the result. That's your total tax.

If I understand your question correctly, what you're trying to formulate is step 4. The marginal rates for ordinary income are determined first, in a sense you're trying to describe, but you go through the marginal rates for capital gains for capital gains regardless and capital gains can't push you into a higher ordinary rates bracket.

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  • (1) How are the capital gains marginal brackets and ordinary income marginal brackets related to each other? (2) I'm not sure if I understand the philosophical distinction that you're drawing between "treated as capital gains" (regarding taxation) and "taxed at the same rate as capital gains".
    – tparker
    Commented Jun 30 at 14:45
  • (3) You claim that capital gains are not taxed on a marginal basis, but "as a block". This contradicts that answers at money.stackexchange.com/a/28984/54568 and money.stackexchange.com/a/150205/54568, as well as this article. Are you claiming that those sources are all wrong?
    – tparker
    Commented Jun 30 at 14:49
  • Note that your interpretation would imply that there's a "tax cliff" for capital gains, i.e. as soon as get an additional dollar in capital gains that pushes your total taxable income over the $47,025 threshold (your link is out of date and refers to the 2023 tax thresholds), your after-tax income drops sharply.
    – tparker
    Commented Jun 30 at 14:50
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    @user1937198 that is incorrect, capital gains are calculated through marginal brackets as well.
    – littleadv
    Commented Jun 30 at 16:42
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    @tparker as I wrote below, neither of them is correct. See my answer for how this works.
    – littleadv
    Commented Jul 1 at 1:01
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I'm not sure what you mean by "taxed first".

In the US, your income gets added up, and then the tax is calculated. Capital gains have a different tax rate than most income, and there are some other special cases, but those are by category, not by the order in which you consider them. Addition is commutative.

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  • "In the US, your income gets added up, and then the tax is calculated." This is incorrect. Your income is taxed on a marginal basis, with different types of income being taxed at different marginal rates. See the answers at money.stackexchange.com/a/28984/54568 and money.stackexchange.com/a/150205/54568, as well as this article.
    – tparker
    Commented Jun 30 at 14:52
  • (Not sure why the site isn't turning those two URLs into hyperlinks, like it is in my comment to the other answer.)
    – tparker
    Commented Jun 30 at 14:53
  • Also, my question lays out the distinction that I'm getting at in a way that seems pretty clear to me. Which option is correct under the U.S. tax code, A or B?
    – tparker
    Commented Jun 30 at 14:54
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    Look at the tax form and it's instructions. I could be missing something, but I believe they confirm that there is no "first" effect.
    – keshlam
    Commented Jun 30 at 15:11
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    Neither is correct...
    – littleadv
    Commented Jun 30 at 23:24

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