 Hello and welcome to this session in which we would look at an example that deals with dividend income, specifically how to compute the taxes when we receive dividend. In the prior session we looked at what is dividend, where does dividend comes out of, earnings and profit, what are the special rules for dividend. In this session we would look at the actual tax computation. So remember dividend is subject to a preferential tax treatment same as the long-term capital gains. Simply put, dividend income is subject to a lower taxes than ordinary income. So what are the dividend tax rate? What are the different tax rates? Well one, we could have a zero tax rate for dividend. How? Well depending on your filing status and your income. If you happen to be filing a single and this is for year 2022, this could change if you're looking at another year. But if you happen to be single and your taxable income is between 0, 41,675, your tax rate is zero. What does that mean? It means you don't pay any dividend, you don't pay any taxes on dividend. However if you're married, filing jointly, they give you more room. Your taxable income could be up to 83,350 and you pay zero taxes. Well that's not always going to be the same. Once your income exceeds for a single individual, 41,675, once it exceeds this amount, well guess what? Now your tax rate is 15% on dividend and that tax rate would apply until you reach 459,750 for married filing jointly. It goes from 83,351 to 85,17,200 and there are different ranges for different filing status such as married filing separately and head of a household. And notice the highest tax rate as of now for dividend is 20% which is this is if you are earnings, if your income is more than 459,751, well that's if you are single, if you are married filing jointly, 517,201. Now that's still lower than your ordinary rate because at this point your rate is approximately 37%. Before we proceed any further, I have a public announcement about my company farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead start your free trial today. So let's take a look at this example to illustrate the concept. We have a single taxpayer with taxable income of 110,000 and $1,000 in dividend and that dividend is separate than the 110,000. So we're going to compute the taxes for this individual. How do we compute the taxes? First, we look at the regular taxable income separate from dividend. Well, this taxpayer has a taxable income of 110. It means, and we did learn how to compute the taxes, if not go to the prior session where we learned how to compute the taxes, this individual falls within this range, 89,075 to 170,050. Again, this is for year 2022 single. Well, what are the taxes? The taxes are 15,213.50 plus 24% of the amount above $89,075. So this is the formula. It's 15,213 plus the amount above 89,075. You multiply it by 24%. And that's going to give us 15,213 plus 20,925. This is the amount and access of the 89,075. We're going to multiply this by 24%. And that's going to give us 15,213 plus 5022, a total taxable of 20,235 and 50 cent. Now, we cannot forget about the dividend because we have $1,000 in dividend. How do we compute the taxes on the dividend? Well, we have to go back to the dividend tax rate for 2022. This individual taxable income is between 41,676 and 459,750. What does that mean? The tax rate is 15%. Therefore, we'll take $1,000 times 15%. And it's going to give us 150. Total tax is obviously 150 plus the 20,235.50. Now, let's take a look at another example with merit filing generally, taxable income of 145, including 5,489 in dividend. Now, what's the difference between this exercise and the prior one? Well, it's how the information is giving to you. In the prior session for this single individual, I said you have taxable income of 110 and a separate $1,000 in dividend. In this example, I said the total 145, including 5,489 in dividend. So what do I have to do? The first thing I have to do is back out the dividend from the regular taxable income. Why? Again, as we started to say, dividend is subject to a preferential tax treatment. Therefore, take it out. What's left is $139,511. Now $139,511 falls in this range from $83,550 to $178,150. Well, what is the tax bill? It's going to be $9,615 plus the amount and access of $83,550 multiplied by 22%, not 24, 22. What's that going to give us? It's going to give us $55,961 times 22%, which is the amount and access. That's going to give us $12,311.42 plus $9,615. The total tax is $21,926.92, and that's on the amount only of $139,511. What do we say? We say this is a 22% marginal tax rate individual. Here, this was, again, not 24, 22. Now, don't forget about the dividend, because we have $5,489 in dividend. Well, that dividend is subject to a preferential tax treatment. What is the preferential tax treatment? Well, this individual taxable income falls in this tax bracket. Therefore, it's subject to 15%. We're going to take $5,489 times 15%, and that's going to give us $823. If you are asked, what is the total tax? It's $21,926.92 plus $823.35. That's the total. Now, let's go ahead and compute the total, $823.35, and that's going to give us, if my math is right, $22,750.27. This is the total tax. We would say the marginal tax rate for this individual is, the marginal tax rate is 22%. Well, what is the average tax rate? Well, the average tax rate, how much did you pay taxes in total is $22,750, based on total income of $145. That's going to be obviously less than 22%, right? $22,750 minus $145,000, and that's going to give us what? $22,750 minus $145,000. Let me reset my calculator here. $22,750 divided by $145,000, and that's going to be $15.68. That's the average. Well, it's going to be, again, as I said, less than $22, because it's going to be less than $22, because that's your highest bracket, and also you paid only 15% on this additional $54.98. So $15.68, not bad at all. What should you do now? Go to the FARHAT lectures and look at additional resources, lectures, MCQs, true-false. That's going to help you understand your income tax scores, your CPA exam material, as well as your enrolled agent. I'm here to help you. Good luck, study hard, and of course, stay safe.