Qualified dividends are a type of investment income earned from stocks and mutual funds that contain stocks. They are a part of corporate profits that are paid to investors. They are taxable income.
This introduces some special considerations at tax time regarding filing rules and various applicable taxes.
- 1 What is a qualified dividend?
- 2 Tax treatment of qualified dividends
- 3 Other types of dividends
- 4 Dividend Income Statement: Form 1099-DIV
- 5 Reports on Form 1040
- 6 Using Schedule B
- 7 The additional Medicare surcharge
- 8 Tax on Net Investment Income
- 9 Frequently asked questions (FAQ)
- A qualified dividend is one that you hold or own for more than 60 days during a 121-day period beginning 60 days before the ex-dividend date.
- Qualified dividends are taxed at long-term capital gains tax rates, which can be much friendlier than ordinary income tax rates.
- Mutual fund companies, brokers, and corporations must issue you a Form 1099-DIV after the end of the tax year, telling you (and the IRS) the amount of your qualified dividends.
- You will need to file Schedule B with your tax return if you have more than $1,500 in interest and/or dividend income.
What is a qualified dividend?
Dividends may be taxed at ordinary income tax rates or at preferential long-term capital gains tax rates. Dividends that qualify for the long-term capital gains tax rates are called “qualified dividends.”
Your dividends qualify if you own or own the shares for more than 60 days during a 121-day period beginning 60 days before the ex-dividend date. Ordinary dividends are more common. They must be clearly designated as such.
The holding period may be longer for preferred stock. These assets must be held for more than 91 days during a 181-day period beginning 90 days before the ex-dividend date. This rule applies if the dividends result from terms of 367 days or more.
Tax treatment of qualified dividends
Qualified dividends were taxed at rates of 0%, 15% or 20% until fiscal year 2017. The rate depended on the taxpayer’s ordinary income tax category. Then the Tax Cuts and Jobs Act (TCJA) came along and changed things starting in January 2018.
The rates are fixed at 0%, 15% and 20%, as they always have been. But long-term earnings have their own tax brackets starting in tax year 2021 (the return you’d file in 2022), thanks to the TCJA. You will fall under the 0% long-term capital gains tax rate for qualified dividends if:
- Your income is less than $40,400 if you are single
- Your income is less than $80,800 if you are married filing jointly with your spouse
- Your income is less than $54,100 if you qualify as head of household
The 15% tax bracket applies to income above these 0% thresholds and applies to income up to:
- $445,850 for individual taxpayers
- $501,600 for married filers filing jointly
- $473,750 for head of household taxpayers
Only taxpayers with income above these 15% thresholds face the 20% capital gains tax rate starting in 2021.
Ordinary dividends are taxed as ordinary income according to the taxpayer’s regular marginal tax bracket.
Other types of dividends
Ordinary dividends are taxed at the same rates as your salary, wages, or other earned income.
You can also receive dividends from a trust or estate, an S corporation, or 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 must receive Schedule K-1 for dividends from these sources.
All other dividends are reported on Form 1099-DIV.
Dividend Income Statement: 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 during the year. The 1099-DIV form reports dividends 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 qualifies for the preferential capital gains tax rate)
- Box 3: Non-dividend distributions, which are a nontaxable return of capital
You can choose to have taxes withheld from your dividends. These amounts should appear in box 4.
Reports on Form 1040
Report dividend income on your 2021 tax return in the following places:
- ordinary dividends are reported on line 3b of your Form 1040.
- Qualified Dividends are reported on Line 3a of your Form 1040.
You can use the Qualified Dividends and Capital Gains Tax Worksheet found in the Form 1040 instructions to figure the tax on qualified dividends at preferred tax rates.
Non-dividend distributions may reduce your cost basis in the stock by the amount of the distribution.
These lines and entries refer to the 2021 tax return that you will file in 2022.
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 should be reported even if you reinvest them, buying more shares.
Using Schedule B
Schedule B is a supplemental tax form used to list interest and dividend income from multiple sources. Use of Schedule B is required if you have more than $1,500 in interest and/or dividend income.
Part I details the taxable interest earned. Part II deals with ordinary dividends.
It may be helpful to use the form to count your interest and dividends to report on Form 1040, even if you are not required to file the form with your tax return.
The additional Medicare surcharge
Dividend income may also trigger Additional Medicare Tax. This tax is effective from tax year 2013. It is in addition to any income tax you may pay on your dividends.
You must pay 0.9% of your net investment income for this Medicare tax if you are married filing jointly and your modified adjusted gross income (MAGI) is $250,000 or more. You must pay it if you are married filing separately and your MAGI is more than $125,000. The income threshold for all other taxpayers is $200,000.
Tax on Net Investment Income
The Net Investment Income Tax is 3.8% more abundant. It kicks in at the income thresholds of your net investment income, or at the same limits of $250,000/$125,000/$200,000 as the Additional Medicare Tax, whichever is lower.
All taxable dividends are investment income, even if they are subject to ordinary rates.
Tax laws change periodically. You should always consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice. It is not a substitute for tax advice.
Frequently asked questions (FAQ)
How do states tax dividends?
Most states tax dividends as regular income, so you’ll pay the same rate on dividends as you pay the rest of your income. New Hampshire taxes all dividends at 5%, regardless of income level. But this tax is being eliminated. It should be completely revoked as of January 1, 2027.
How often are dividends paid?
Aside from real estate investment trusts (REITs), most companies have a lot of latitude in how often they pay dividends, when they choose to do so, and how much that payment will be. Many companies that offer dividends do so quarterly. But this is not a requirement. They can change their plans at any time until the dividend is announced.
What are Section 199a dividends?
Section 199a deductions were introduced by the Tax Cuts and Jobs Act which took effect in 2018. The TCJA allows individual taxpayers to deduct up to 20% of qualified dividends from domestic REITs and partnership income public.