US Taxes - Do dividends qualify for the standard deduction?

[FlamingWombat]

Long-time self tax preparer, but first time with dividends. The FEIE wipes out my salary, but do dividends and capital gains qualify for the standard deduction? i.e. if one's total dividend/capital gains/interest are less than say the $12,550 deduction for married filing separately (and income tax is cancelled by the FEIE), they wouldn't owe any tax? Or, is this unearned income like dividends not covered by the standard deduction and therefore taxable?

[captainspoke]

Yes, you're free and clear up to the 12.5k threshold, no worries. Above that and another factor is that qualified dividends don't get taxed until they are quite a bit above that--I've read 40k, but it's been a while since I read that so don't take that as gospel. And since your income effectively starts off at zero due to the exclusion, for any tax due it'll start off in the lowest bracket.

[FlamingWombat]

Thanks. And yeah, the tax rate on qualified dividends for single or married filing separately is 0% if your taxable income is under $40,400. I don't know how taking the FEIE to wipe out one's income affects that.

[TokyoWart]

Thanks. And yeah, the tax rate on qualified dividends for single or married filing separately is 0% if your taxable income is under $40,400. I don't know how taking the FEIE to wipe out one's income affects that.

The income excluded by FEIE is added back to see if you reach the $40K threshold for taxation of long term capital gains. This is one of the "stacking rules" whereby the FEIE excluded income still counts as income for the determining certain tax brackets and eligibility for some credits.

[FlamingWombat]

Thank you for the clarification. So most of us would fall into the 15% bracket for capital gains (income of $40,401 to $445,850). But that 15% would still be wiped out by the standard deduction, correct? If our dividends/gains go above the standard deduction (currently $12,550 single/married filing separately) then we would get taxed at our bracket for income before FEIE wipes it out, i.e. our actual income?

[TokyoWart]

Thank you for the clarification. So most of us would fall into the 15% bracket for capital gains (income of $40,401 to $445,850). But that 15% would still be wiped out by the standard deduction, correct? If our dividends/gains go above the standard deduction (currently $12,550 single/married filing separately) then we would get taxed at our bracket for income before FEIE wipes it out, i.e. our actual income?

Yes, I think that is the case for most expats. For instance, if you had $80,000 in earned income and $10,000 in qualified dividends or capital gains the FEIE would cover the earned income and then your standard deduction would cover the dividends and capital gains. You would be in the 15% tax bracket but no US taxes would actually be due.

[TJKansai]

Yes, you're free and clear up to the 12.5k threshold, no worries. Above that and another factor is that qualified dividends don't get taxed until they are quite a bit above that--I've read 40k, but it's been a while since I read that so don't take that as gospel. And since your income effectively starts off at zero due to the exclusion, for any tax due it'll start off in the lowest bracket.

Even above the 12.5 threshold, assuming you are getting credit for paying Japan tax on the dividends.