How To Have Income - Tax Free

As many of my long time readers know, I am a HUGE fan of stocks that pay dividends. I know dividends may sound boring, but the exciting advantage of dividends is that they can be free of income taxes, making them an excellent source of income at nearly any stage of life. To understand how to have this tax free income, you will want to know the difference between qualified and unqualified dividends.

Before I get into the tax implications, stocks that pay dividends offer significant advantages to stocks that don't.

When a stock pays a dividend, you get paid regardless of where the stock price goes. And we all know how, in the short term, stock prices are mostly unpredictable. I love the fact that I get paid regardless of where the market goes. And if the market moves higher, it's a bonus on top of the dividends paid.

Dividends also help put a floor under a stock during bear markets. Dividend-paying stocks tend to perform much better than their non-paying dividend counterparts. This is due to the dividend yield moving higher as the stock price moves lower, making the stock more attractive sooner in a decline to bottom-fishers.

Thanks to our tax code, dividends can also be paid free of income tax, but only if the dividends are "qualified" dividends.

Unqualified dividends are taxed at your normal income tax rates. Income tax brackets in 2025 vary from 10% for incomes at or below $23,850 (married filing jointly) to 37% for incomes exceeding $751,600 (married filing jointly). So at a minimum, you will pay 10% tax on your unqualified dividends.

Qualified dividends, however, are taxed at capital gains rates which are either 0% (income up to $96,700 married), 15% (income between $96,700 and $600,050), or 20% (income above $600,051).

For a dividend to be considered "qualified", it must meet the following criteria:

• The dividend must be paid by a U.S. Corporation or qualified foreign corporation. So pretty much any major corporation traded on the stock exchanges. Note that there are exceptions, which include dividends paid by REITs (Real Estate Investment Trusts). REITs are generally considered "unqualified" dividends.

  
  

• The investor must have held the stock for more than 60 days during the 121-day period, beginning 60 days before the ex-dividend date. An ex-dividend date is the date the stock begins trading without the right to receive the next dividend. This tax treatment encourages investors to own stocks for the long-term.

What this means is that if your taxable income is less than $96,700 (married filing jointly), you can earn over $8,050 per month in tax free dividend income! And $8,050 each month is enough income for many people to live comfortably, or to provide a nice padding to other income, such as social security!

Even if your earned income is higher, let's say $300,000/yr, you would still only pay a 15% tax rate on your qualified dividends, whereas if you earned $8,050 every month instead of it being paid as dividends, that income would be in the 22% tax bracket. Even higher incomes benefit from qualified dividends.

How do you know if the dividends you earn are qualified? The is the easy part! When you receive a 1099-DIV form at the end of the year reporting your dividend income, your broker breaks out qualified dividends in box 1b. Your income tax software takes care of it from there.

Turning your income over to the government is never a good wealth-building strategy. But using the tools the government provides us to legally avoid taxes is a sure bet. Dividends provide a great supplemental income, and that income only gets better when no taxes are owed!

Gradually and regularly accumulating qualified dividend-paying stocks is within the reach of any income bracket. If you can afford $20, you can afford to start acquiring dividend stocks, and thereby start accumulating capital.

Or as I like to ask, do you own a piece of America? Or do you just work here?