(By Miranda Marquit) As an investor, it’s vital that you understand how your earnings are taxed. Different sources of investment income are taxed in different ways, so you need to be on top of the situation.

Dividends are considered different from capital gains income, and from regular income for tax purposes. Dividend income is reported as such on your income tax return, and taxed at a preferred rate (at least for now).

Preferred Tax Rate for Qualified Dividends

The current preferred tax rate for qualified dividends is 0% for those in the lowest two tax brackets, 15% for those in the next brackets up, and 20% for couples earning $450,000 a year or singles earning $400,000 a year.

It’s unclear how long the preferred rate will last, however. The preferred rate on qualified dividends was supposed to be temporary and expire at the end of 2012, but a tax deal extended the preferred rate. As long as Congress is willing to keep extending the rate, you can get a good deal on your dividends. But pay attention: The rate could still expire.

Next, you have to understand what makes a dividend qualified. The IRS offers this guidance on qualified dividends:

[Y]ou must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.

If you want your dividends to be considered qualified, the IRS likes to you to have held the stock for a certain period of time. In many cases of preferred rates for investments, the IRS rewards you for thinking long-term.

Taxes and Reinvested Dividends

Many dividend investors like to reinvest their earnings. This makes sense, since reinvested earnings can lead to long-term wealth. However, even if you have an automatic reinvestment plan with the company’s dividends, you still have to pay taxes in the year that you earn them.

It doesn’t matter that you didn’t actually receive a payout in cash. Your reinvested dividends still count as income in the eyes of the IRS, and you are required to pay taxes on them. Plan ahead for this eventuality.

Shelter Your Dividend Earnings

You can avoid paying taxes on your dividends if you shelter them in a specific type of account.

When you keep dividend stocks in a traditional IRA or 401(k), taxes on your dividend earnings are deferred. You won’t have to pay taxes on them until later. Unfortunately, this can actually destroy the preferred treatment of dividend earnings. Once you begin withdrawing from your traditional retirement account, the earnings count as regular income. If you are in a higher tax bracket, you lose out on the lower preferred rate offered right now.

On the other hand, if you keep your dividend stocks in a tax-free retirement account like a Roth IRA or Roth 401(k), you can avoid paying taxes on your dividend earnings at all. Purchase shares of your dividend stocks with after-tax money, and have the dividends reinvested, and you can boost your account growth over time, and never pay taxes on your dividends.

Dividends can be a great way to build wealth and create long-term income diversity. However, you have to plan out your strategy, and be aware of the tax consequences.