Not all dividends are treated equally for tax purposes, so it's important to know what to expect when you file your tax return early next year. While the Tax Cuts and Jobs Act didn't make any big changes to the way dividend income is taxed, the new 2018 tax brackets and income thresholds for dividend taxation could change how much you'll have to pay. With that in mind, here's a guide to dividend taxes for the 2018 tax year in the United States.

There are two different ways dividends can be taxed

For tax purposes, dividends paid by stocks are grouped into two categories -- qualified dividends and ordinary dividends.

Tax forms, calculator, money, pencils, and glasses on a table.

Image Source: Getty Images.

Qualified dividends must meet a couple of key requirements:

  • They must have been paid by a U.S. corporation or qualified foreign corporation, which typically means that the stock is tradable on U.S. markets or is incorporated in a U.S. possession.
  • You must have held the stock for 60 days during a 121-day window beginning 60 days before the ex-dividend date and ending 60 days afterward. For preferred stock dividends, you must have held the stock for a 90-day period during the 181-day window beginning 90 days before the ex-dividend date.

Certain types of dividends never count as qualified dividends. These include but aren't necessarily limited to:

  • Dividends from tax-exempt organizations
  • Capital gain
  • Dividends paid on deposits with banking institutions, such as credit unions
  • Dividends paid by a corporation on securities held in an employee stock ownership plan (ESOP)

It's also important to mention that some dividends can be considered to be more than one type of payments. Real estate investment trusts, or REITs, are a good example of this. Most dividends paid by REITs are considered to be ordinary income, but some can be considered capital gains or returns of capital, depending on how the REIT made its money during the tax year.

For example, net-lease REIT Realty Income (NYSE: O) paid $2.527 per share in dividends during 2017. Roughly 77% of this amount was treated as ordinary income, 22% was considered a nontaxable return of capital, and about 1.5% was considered a capital gain distribution, which is always taxed as a long-term capital gain (same rates as qualified dividends).

Dividend tax rates in 2018

If your dividends meet the definition of "qualified dividends," they will be taxed at a rate of 0%, 15%, or 20%, depending on your adjusted gross income, or AGI. According to the Tax Cuts and Jobs Act, here are the AGI thresholds for the 2018 tax year.

Qualified Dividend Tax Rate

Single Filing Status

Married Filing Jointly

Head of Household

Married Filing Separately

0%

$0-$38,600

$0-$77,200

$0-$51,700

$0-$38,600

15%

$38,601-$425,800

$77,201-$479,000

$51,701-$452,400

$38,601-$239,500

20%

$425,801 or more

$479,001 or more

$452,401 or more

$239,501 or more

Data Source: IRS.

If your dividends aren't qualified, they will be taxed at your marginal tax rate, according to the 2018 tax brackets. As part of the tax overhaul, the seven brackets have been adjusted to 10%, 12%, 22%, 24%, 32%, 35%, and 37%, and you can determine yours using our guide to the 2018 tax brackets.

Another tax high-income investors may have to pay

On top of the tax rates discussed in the previous section and any applicable state taxes you might owe, high-income investors are also required to pay a 3.8% net investment income tax.

Investors will owe net investment income tax if they have any net investment income (interest, dividends, capital gains, etc.) and have modified AGI in excess of these thresholds:

Tax Filing Status

MAGI Threshold

Single

$200,000

Married filing jointly or qualifying widow(er)

$250,000

Head of household

$200,000

Married filing separately

$125,000

Data Source: IRS.

Finally, it's important to note that unlike the tax brackets, these thresholds are not indexed for inflation. So, they'll remain the same unless the law governing them changes.

Keeping track

Nobody likes paying taxes (at least not anyone I've met), but one piece of good news is that your brokerage does the record-keeping for you. When you receive your 1099-DIV form in early 2019, your dividends will be listed on line 1a. Line 1b will tell you how much of this amount came from dividends that met the definition of qualified.

Your dividends will be reported on lines 9a and 9b of form 1040, and if your total dividends received for the year exceeded $1,500, you'll have to fill out Schedule B as well. And just so you're aware, your broker sends a copy of your 1099-DIV to the IRS as well, so they know exactly how much dividend income you should be reporting.

The best (legal) way to avoid dividend taxes

As a final thought, keep in mind that these dividend taxes only apply to dividends paid in a taxable brokerage account. By investing in dividend stocks thorough a traditional or Roth IRA or one of the self-employed retirement account types, you don't pay any dividend taxes from year to year. So, if you're thinking of buying dividend stocks -- especially those whose distributions don't meet the definition of qualified dividends -- it may be a smart idea to consider doing so in a tax-advantaged account.

Matthew Frankel owns shares of Realty Income. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.