Favorable tax rates apply to long-term capital gains which are profits on investments held longer than a year. Also, favorable rates apply to dividends that are “qualified,” which most are.
Short-term capital gains on investments held a year or less and Nonqualified dividends are taxed at the same rates as ordinary income.
A favorable zero tax rate on these types of investment income is applicable for married couples, filing jointly, up to a threshold $78,750 of taxable income ($39,375 for singles).
For example, Jim is a single taxpayer with $30,000 of taxable ordinary income. His taxable income is subject to regular tax rates up to 12%, as detailed in the tax brackets.
But Jim also has a $20,000 in qualified dividends. This $20,000 “stacks” on top of his $30,000 of taxable income.
The 15% bracket for qualified dividends and long-term capital gains begins at $39,375 of taxable income.
As a result, on his qualified dividends, Jim would owe zero tax on $9,375 and 15% tax on the remaining $10,625.