Q:

How are dividends and capital gains taxed differently?

A:

Quick Answer

Capital gains and dividends are taxed at a lower rate than ordinary income, according to Tax Policy Center. However, only long-term capital gains and "qualified dividends" are subject to this lower tax rate, states Investopedia.

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How are dividends and capital gains taxed differently?
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Full Answer

For a dividend to be qualified, it must have been held for at least 60 days out of the 121 day period that begins two months prior to the ex-dividend date, explains Investopedia. Capital gains are considered long-term if the asset was held at least one full year prior to being sold, according to Tax Policy Center.

For 2015, individuals with a total income less than $37,450 and families and widowers with an income less than $74,900 do not have to pay tax on any qualified dividends or long-term capital gains, according to Charles Schwab. For individuals or families in the 25, 28, 33 or 35 percent tax brackets, long-term capital gains and qualified dividends are taxed at a rate of 15 percent. For those in the highest tax bracket, long-term capital gains and qualified dividends are taxed at 20 percent.

While most assets can count as capital gains and are thus subject to these lowered tax rates, art and collectible items fall into a special category and are subject to a 28 percent tax rate, states the Tax Policy Center.

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