Though most dividends paid out by corporations or mutual funds to shareholders are considered ordinary dividends, some may be consideredqualified dividends. In these cases, your dividend income is subject to thecapital gains taxrate rather than your income tax rate, which is higher. Qualified dividends are thus included in a taxpayer's adjusted gross income; however, these are taxed at a lower rate than ordinary dividends.
Key Takeaways
- All dividends paid to shareholders must be included on their gross income, but qualified dividends will get more favorable tax treatment.
- A qualified dividend is taxed at the capital gains tax rate, while ordinary dividends are taxed at standard federal income tax rates.
- Qualified dividends must meet special requirements put in place by the IRS.
- The maximum tax rate for qualified dividends is 20%; for ordinary dividends for the 2023 calendar year, it is 37%.
Ordinary Dividends Versus Qualified Dividends
Qualified and unqualified dividends may have differences which appear to be minor, but they have a significant impact on overall returns. Overall, most regular dividends distributed by companies in the U.S. are qualified. The biggest difference between qualified and unqualified dividends as far as their impact come tax time is the rate at which these dividends are taxed. Unqualified dividends are taxed at an individual’s normal income tax rate, as opposed to the preferred rate for qualified dividends as listed above. This means that individuals occupying any tax bracket will see a difference in their tax rates depending upon whether they have qualified or ordinary dividends.
To be considered a qualified dividend, a dividend must be paid by an American corporation or a qualified foreign entity. In addition, you must have held the stock for which the dividend was paid for at least 60 days within the 121-day period that ends 60 days prior to the ex-dividend date. If theex-dividend dateis Dec. 1, for example, then you must have owned the stock for at least 60 days during the period between June 3 and Oct. 2.
Taxation and Dividends
According to the Internal Revenue Service (IRS), ordinary dividends are paid out of a corporation or mutual fund's earnings and taxed at the same rate as ordinary income. These payouts are shown in box 1a of Form 1099-DIV, which is sent to investors.
Qualified dividends are similar to ordinary dividends but are subject to the same 0%,15% or 20% rates that apply to long-term capital gains. Your qualified dividends will appear in box 1b of Form 1099-DIV. The maximum rates are:
- 0% if your ordinary income is taxed at 10% or 15%
- 15% if you are taxed at a rate greater than 15% but less than 37%
- 20% if your ordinary income is taxed at 37%
To meet the requirements for a qualified dividend, the dividend must have been paid by a U.S. corporation or a qualified foreign corporation and meet the holding period, which is more than 60 days during a 121-day period, which starts 60 days prior to the ex-dividend date. The holding period is different for preferred stock.
Example
Company ABC declares 25-cent dividends per share. If an investor owns 10,000 shares of ABC Corporation common stock, the dividend payment received is $2,500. If the ex-dividend date is July 1, the investor needs to have owned the stock for more than 60 days from May 2 through Oct. 30, or the 121-day period, for the payout to be considered a qualified dividend.
FAQs
Key Takeaways
All dividends paid to shareholders must be included on their gross income, but qualified dividends will get more favorable tax treatment. A qualified dividend is taxed at the capital gains tax rate, while ordinary dividends are taxed at standard federal income tax rates.
Should dividends be included in gross income? ›
Gross income includes wages, dividends, capital gains, business and retirement income as well as all other forms income.
Can you count dividends as income? ›
Many investments also pay dividends to their shareholders. Dividends provide periodic income, which you can use to spend, save or reinvest. But where there's income, there are usually taxes. Dividends are considered taxable income, and they're taxed differently depending on the type of dividend you receive.
How do you account for qualified dividends? ›
Qualified dividends are reported on Form 1099-DIV in line 1b or column 1b. However, not all dividends reported on those lines may have met the holding period requirement. Those non-qualified dividends, as well as other ordinary dividends, may be taxed at your ordinary income tax rate, which can be as high as 37%.
Do I include qualified dividends as ordinary dividends? ›
Ordinary dividends are the total of all the dividends reported on a 1099-DIV form. Qualified dividends are all or a portion of the total ordinary dividends.
How are qualified dividends accounted for on 1040? ›
Report dividend income on your 2022 tax return—Form 1040 —in the following places: Ordinary dividends are reported on Line 3b. Qualified dividends are reported on Line 3a.
Do qualified dividends affect your tax bracket? ›
Qualified dividends are taxed at capital gain rates of 0%, 15%, or 20%, depending on your tax bracket. If you are: In the 10% or 12% tax bracket, your qualified dividends are taxed at 0%, In the 22%, 24%, 32%, or 35% tax bracket, your qualified dividends are taxed at 15%, and.
How to calculate gross income? ›
Alternatively, you can calculate your gross income as (1) your monthly salary before taxes or (2) the number of hours you will work in a given month multiplied by your hourly pay rate.
Which of the following payments to a taxpayer should be included in gross income? ›
Generally, you must include in gross income everything you receive in payment for personal services. In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options.
Where do I report qualified dividends? ›
Enter any qualified dividends from box 1b on Form 1099-DIV on line 3a of Form 1040, Form 1040-SR or Form 1040-NR.
Line 3a captures your qualified dividends and line 3b captures your ordinary dividends. Dividends are distributions from companies to shareholders.
What are the IRS rules for qualified dividends? ›
Qualified dividends, as defined by the United States Internal Revenue Code, are ordinary dividends that meet specific criteria to be taxed at the lower long-term capital gains tax rate rather than at higher tax rate for an individual's ordinary income. The rates on qualified dividends range from 0 to 23.8%.
How do I avoid paying taxes on qualified dividends? ›
Strategies such as contributions to retirement accounts and health savings accounts (HSAs) may reduce your income below the zero-capital gains tax threshold. As a result, you wouldn't owe any taxes on qualified dividends.
How are qualified dividends treated? ›
Qualified dividends are taxed at the same rates as the capital gains tax rate, which is lower than ordinary income tax rates. The tax rates for ordinary dividends are the same as standard federal income tax rates; 10% to 37%.
Are qualified dividends added to taxable income? ›
They're paid out of the earnings and profits of the corporation. Dividends can be classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates.
How do qualified dividends affect my taxes? ›
How dividends are taxed depends on your income, filing status and whether the dividend is qualified or nonqualified. Qualified dividends are taxed at 0%, 15% or 20% depending on taxable income and filing status. Nonqualified dividends are taxed as income at rates up to 37%.
Where do I report qualified dividends on my tax return? ›
Ordinary dividends are reported in box 1a, and qualified dividends in box 1b.
Do you have to pay taxes on qualified dividends? ›
Qualified dividends are taxed at the same rates as the capital gains tax rate, which is lower than ordinary income tax rates. The tax rates for ordinary dividends are the same as standard federal income tax rates; 10% to 37%.
