Federal Taxation of Dividends
Dividends can be taxed at different rates
Dividends are a type of investment income generated from stocks and from mutual funds that contain stocks. They represent a share of corporate profits paid out to investors, and they're taxed when they're paid out. If your income includes dividends, this presents some special considerations at tax time.
Tax Treatment of Dividends
Dividends can be taxed either at the ordinary income tax rates or at the preferred long-term capital gains tax rates.
Dividends that qualify for the lower long-term capital gains tax rates are called qualified dividends. They're taxed at rates of 0, 15 or 20 percent, depending on your tax bracket.
If you fall into the 10 or 15 percent tax bracket, your tax rate on dividends is zero. You must include the dividend income with your other income for purposes of determining your tax bracket. The 15 percent rate applies if you're in any of the 25 through 35 percent tax brackets, and you'll pay 20 percent on qualified dividends if you're in the 39.6 percent bracket. You'd be in this bracket if your taxable income is more than $418,400 as of 2017.
Ordinary rates range from 10 to 39.6 percent – the tax brackets as of 2017. In other words, these dividends are taxed exactly the same way as your salary, wages or other earned income.
What Is a Qualified Dividend?
According to the Internal Revenue Service, an investor "must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date" to be considered a qualified dividend.
But this holding period can be longer in the case of preferred stock, which must be held for 90 days or more during a 181-day period that begins 90 days before the ex-dividend date. This rule applies if the dividends result from time periods exceeding 366 days.
Other Types of Dividends
You might also receive dividends from a trust or estate, an S-corporation or a partnership.
Regardless of whether the corporation or partnership pays you in cash, stock options or tangible property, the transaction still represents dividends and the value must be reported on your tax return.
You would receive Schedule K-1 for dividends from these sources. All other dividends are reported to investors on Form 1099-DIV
Reporting Dividend Income
Form 1099-DIV is issued by mutual fund companies, brokers and corporations to an investor if $10 or more of dividend income was paid out during the year. Form 1099-DIV reports dividends information in the following places:
- Box 1a: Ordinary dividends reflecting the total amount of dividends paid to you
- Box 1b: Qualified dividends – the portion of total dividends that qualify for the preferred capital gains tax rate
- Box 3: Non-dividend distributions, which are a nontaxable return of capital
Dividends are typically ordinary unless a Form 1099-DIV states otherwise.
You'll report dividend income on your tax return in the following places:
- Ordinary dividends are reported on Line 9a of your Form 1040 or Form 1040A.
- Qualified dividends are reported on Line 9b of your Form 1040 or 1040A. Be sure to use the Qualified Dividends and Capital Gain Tax Worksheet found in the instructions for Form 1040 or 1040A to calculate the tax on qualified dividends at the preferred tax rates.
- Non-dividend distributions reduce your cost basis in the stock by the amount of the distribution.
You must still report dividend income on your tax return even if you don't receive a Form 1099-DIV for it for some reason. If you reinvest the dividends, purchasing additional stock, they're still taxable and must be reported.
Using Schedule B
Schedule B is a supplemental tax form used to list interest and dividend income from multiple sources. Using Schedule B is required if you have over $1,500 in interest income and/or dividends. It can be helpful to use the form to tally up your interest and dividends for reporting on your Form 1040 even if you're not required to file it with your tax return.
The Additional Medicare Surcharge
Dividend income can also prompt the Additional Medicare Tax which has been in place since the 2013 tax year.
This tax is in addition to any income tax you may owe on the dividends. If you're single with a modified adjusted gross income of $200,000 or more, or if you're married and your MAGI is more than $250,000, you must pay an additional 3.8 percent of your net investment income toward Medicare tax. All taxable dividends are considered investment income, even if they're taxed at ordinary rates.