More On Tax Planningfrom The Advisor's Professional Library
- IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.
- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
The United States has one of the highest tax rates for personal dividend income in the OECD, according to recent research conducted by the Tax Foundation.
The top federal rate on dividend income for individual taxpayers is 23.8% — 20% for those in the top marginal tax rate, plus a 3.8% net investment tax to fund the Affordable Care Act. At the state level, the dividend tax is as high as 13.3% in California.
To help investors, advisors and others best understand taxes on dividends and the different factors that influence them, the Tax Foundation recently put together a map that shows the combined federal, state and local top marginal tax rate on personal dividend income by state.
The research takes into account the deductibility of state taxes against federal taxes, local income taxes, the phase-out of itemized deductions and special treatment of personal dividend income. (It was conducted by Tax Foundation economist Kyle Pomerleau and communications manager Richard Borean.)
According to the organization, most states tax personal dividend income as ordinary income. As a result, states with high income tax rates have the highest taxes on personal dividends.
The highest top combined (federal and state) dividend tax rate in the United States is 33% in California, followed by New York (31.5%) and Hawaii (31.6%).
Taxpayers in some states with no personal income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) have a top marginal tax rate on personal dividend income of 25%.
New Hampshire and Tennessee do not tax personal income but levy a tax on dividend income of 5% and 6%, respectively.
Nationwide, the average dividend income tax is 28.6%.
Check out Charting the New 3.8% Investment Tax Waters on ThinkAdvisor.