Dividends and Qualified Dividends
Dividends are a type of investment income that’s earned from stocks and mutual funds that contain stocks. They’re a share of corporate profits that are paid out to investors. They’re taxable income. Your dividends are considered “qualified” if you hold or own the stock for more than 60 days during a 121-day period that begins 60 days before the ex-dividend date. Ordinary dividends are more common. They are usually designated as such.
Capital Gains Tax Rates for Qualified Dividends
When you earn a dividend on an investment, you have to pay the capital gains tax on it. You’ll fall into the 0% long-term capital gains tax rate for qualified dividends if your income meets the following thresholds for tax year 2022, the return you file in 2023:
Less than $41,675 if you’re singleLess than $83,350 if you’re married and you file a joint return with your spouseLess than $55,800 if you qualify as head of household
The 15% tax bracket kicks in at incomes above the 0% thresholds above and applies to incomes of up to:
$459,750 for single filers$517,200 for married filers of joint returns$488,500 for head of household filers
Only taxpayers with incomes in excess of these 15% thresholds are faced with the 20% capital gains tax rate. For 2023, the income thresholds for the tax rates of 0%, 15%, and 20% range from $44,625 for single filers to $553,850 for married taxpayers filing jointly. The IRS outlines the details in Revenue Procedure 2022-38.
Other Types of Dividends
Ordinary dividends are taxed at the same rates as your salary, wages, or other earned income. You might also receive dividends from a trust or an estate, from an S-corporation, or from a partnership. The transaction still represents dividends. The value must be reported on your tax return, regardless of whether the corporation or partnership pays you in cash, stock options, or tangible property. You should receive Schedule K-1 for dividends from these sources. All other dividends are reported on Form 1099-DIV.
Reporting Dividend Income: Form 1099-DIV
Form 1099-DIV is issued to investors by mutual fund companies, brokers, and corporations when $10 or more in dividend income is paid out during the year. Form 1099-DIV reports dividends in the following places:
Box 1a: Ordinary dividends reflecting the total amount of dividends paid to youBox 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
You can elect to have taxes withheld from your dividends. These amounts should appear in box 4.
Reporting Dividend Income on Tax Form 1040
Report dividend income on your 2022 tax return—Form 1040—in the following places:
Ordinary dividends are reported on Line 3bQualified dividends are reported on Line 3a
You can use the Qualified Dividends and Capital Gain Tax Worksheet found in the instructions for Form 1040 to figure out the tax on qualified dividends at the preferred tax rates. Non-dividend distributions can reduce your cost basis in the stock by the amount of the distribution. You must report dividend income on your tax return even if you don’t receive a Form 1099-DIV for some reason. Dividends are taxable regardless. They must be reported even if you reinvest them, buying more stock.
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 dividends. Part I details taxable interest earned. Part II pertains to ordinary dividends.
The Additional Medicare Surcharge
Dividend income can also prompt the Additional Medicare Tax. It’s in addition to any income tax you might pay on your dividends. You must pay 0.9% of your net investment income toward this Medicare tax if you’re married filing jointly and your modified adjusted gross income (MAGI) is $250,000 or more. You must pay it if you’re married filing separately and your MAGI is more than $125,000. The income threshold for all other taxpayers is $200,000.
The Net Investment Income Tax
The Net Investment Income Tax is a heartier 3.8%. It kicks in at the income thresholds of your net investment income, or at the same income limits as the Additional Medicare Tax, whichever is less. All taxable dividends are investment income, even if they’re taxed at ordinary rates.
