Does standard deduction apply to dividends and interest?
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CreatingMarina
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BostonFI
4 months ago
Yes. Dividends and interest are part of your total gross income. After subtracting some things from your gross income like deductible traditional IRA contributions (these subtractions are called adjustments), you end up with your Adjusted Gross Income (AGI). You then subtract deductions—either the standard deduction or itemized deductions—from your AGI to get your taxable income. There are other steps after this like applying tax credits to reduce the tax owed.
@Cody Garrett, CFP® and Sean Mullaney wrote a great book that explains the details of how federal income tax is determined plus most everything else you may want to know about taxes. It's a great book to have on hand for reference: Tax Planning To and Through Early Retirement.
NickCincyFI
4 months ago
Yup. The deduction reduces all taxable income together, including:
- Wages
- Interest
- Dividends
- Business income
- Capital gains
brub888
4 months ago
The standard deduction first is deducted from "ordinary" income and then deducted from "preference" income (aka LTCG and qualified dividends). Total taxes are the sum of tax on ordinary income and tax on preference income then less any credits.
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