Would you rather have $100,000 in salary, or $100,000 in dividends?
I ran the following scenarios through TurboTax 2018. You could do the same thing with any tax preparation software. All you need are the following pieces of information:
- The amount of salary or dividends. I chose $100,000 because it is a nice round number.
- The employee half of the Social Security tax, which is 6.2%.
- The employee half of the Medicare tax, which is 1.45%.
- The amount of the standard deduction, which is $12,000 per person.
- The tax brackets, available at the IRS website.
If you file as single:
Suppose you earn $100,000 in salary, reported on a W2. The employee half of the Social Security tax is 6.2%, so you paid $6,200. The employee half of the Medicare tax is 1.45%, so you paid $1,450. You receive one standard deduction worth $12,000, so your taxable income is $88,000. That puts you in the 24% bracket, so your federal tax is $15,416. You paid $23,066, so your net income is $76,934.
Suppose you earn $100,000 in qualified dividends, reported on a 1099. There is no Social Security tax on dividend income. There is no Medicare tax on dividend income. You receive one standard deduction worth $12,000, so your taxable income is $88,000. $38,600 is taxed at the 0% bracket, and $49,400 is taxed at the 15% bracket, so your federal tax is $7,410. You paid $7,410, so your net income is $92,590.
If you file as married filing jointly:
Suppose you earn $100,000 in salary, reported on a W2. The employee half of the Social Security tax is 6.2%, so you paid $6,200. The employee half of the Medicare tax is 1.45%, so you paid $1,450. You receive two standard deductions worth $24,000, so your taxable income is $76,000. That puts you in the 12% bracket, so your federal tax is $8,742. You paid $16,392, so your net income is $83,608.
Suppose you earn $100,000 in qualified dividends, reported on a 1099. There is no Social Security tax on dividend income. There is no Medicare tax on dividend income. You receive two standard deductions worth $24,000, so your taxable income is $76,000. $76,000 is taxed at the 0% bracket, so your federal tax is $0. You paid $0, so your net income is $100,000.
How to reach $100,000 in dividends?
You might be thinking, "$100,000 in dividends is great, but how do I get from here to there?".
My article "How To Estimate Dividend Income" covers that.
Do I really need as much as $100,000 in dividends?
Perhaps not.
You start with a budget. What will be your expenses? How much income do you need to cover your expenses? Where will that income come from?
You might receive some Social Security benefits. You might receive some pension benefits. You might receive some annuity benefits.
You might only need $(expenses - Social Security - pension - annuity) in dividends.
What about $100,000 in capital gains?
While it is true that the same tax rates apply to long-term capital gains and dividends, I have far more confidence in my portfolio's ability to pay dividends than to produce capital gains. I can predict my dividends, and my dividend raises, with more accuracy, dependability, and reliability than I can predict capital gains (especially given recent market volatility). Retired investors need that dependability and reliability.
Conclusions
You pay less tax filing as married filing jointly rather than single.
I plan to keep making my wife happy, so we stay married, so we continue to file as married filing jointly. I told her last night, "You're more to me than just another pretty deduction."
You pay less tax on dividends than on salary.
I retired two years ago. My wife still works, but is talking about retiring in 2-3 years.
I look forward to when she retires, so we can receive $100,000/year in dividends and pay $0 in federal taxes.
Robert Allan Schwartz
I retired in November 2016 at age 60.My personal investing goal is to own a portfolio of dividend growth companies such that:1) The overall portfolio dividend income is sufficient to pay for all of my routine retirement expenses. I do not ever want to be forced to sell something to produce cash, especially when my asset prices are down. [I have no objection to occasionally choosing to sell something to pay for a one-time expense such as a vacation or a gift.]and2) The overall portfolio dividend income rises each year by more than the rate of inflation, so that my purchasing power does not erode over time.I invest primarily in David Fish's lists of Dividend Champions, Dividend Contenders, and Dividend Challengers. See http://www.dripinvesting.org/tools for those lists.I do not invest in MLP's or BDC's or CEF's or preferreds.I maintain a free web site that contains dividend histories for all of David Fish's Dividend Champions, Contenders and Challengers: http://www.tessellation.com/dividends
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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