Understanding dividend tax rates

Q: I understand that the capital gains tax rate will jump from 15% to 20% if taxable income for a married couple filing jointly is more than $501,600 in 2021. Is this also true for dividend income?

A: It depends which type of dividends you’re talking about. Qualified dividends are taxed at the same rates as long-term capital gains — 0%, 15% or 20%. Most dividends paid on common stock are qualified, but there is a time test they must meet. To be considered qualified, the stock must be held for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. Nonqualified or ordinary dividends are taxed at the federal income tax rates of 10% to 37%, the same rates for taxing wages and ordinary income. For more information about qualified dividends, see IRS Publication 550.

Q: What is the Social Security cost-ofliving adjustment, or COLA?

A: COLAs are calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (similar to, but not exactly the same as, the urban dwellers’ consumer price index used in inflation reporting). If prices don’t increase and even fall, the COLA is zero. That happened in 2010 and 2011, as the economy struggled to recover from the Great Recession, and again in 2016, when plummeting oil prices swept away any chance of a COLA for that year. For 2021, Social Security benefits increased by 1.3%. That was the smallest cost-of-living adjustment (COLA) since

2017 — but consider that, initially, thanks to pandemic-induced price gyrations, retirees were looking at the prospect of no increase at all in 2021.

The estimated average monthly Social Security benefit payable in January 2021 increased from $1,523 in 2020 to $1,543. The average monthly benefit for a couple who are both receiving benefits rose $33, from $2,563 to $2,596. And the maximum Social Security benefit for a worker retiring at full retirement age increased from $3,011 per month to $3,148, an additional $137.

Also, more of workers’ income is subject to the Social Security tax in 2021. The Social Security tax will apply to the first $142,800 of earnings, up $5,100 from $137,700 in

2020.

As for 2022, seniors could get a significant increase in their benefits. In July, the Kiplinger Letter forecast that the annual COLA for Social Security benefits for 2022 would be 6.3%, the biggest jump since 1982, when benefits rose 7.4%.

Q: Is money that’s transferred to a qualified longevity annuity contract (QLAC) or a qualified charitable distribution (QCD) taxable?

A: Although a QLAC, which is a type of deferred annuity, isn’t taxable when you fund it, the payments that you eventually receive from it are taxed as income. A QCD isn’t taxable at all because by donating your IRA distribution directly to charity, you avoid the income tax on the required withdrawal.