Taxes on Ordinary, Qualified Dividends
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What Are Dividends?
The most common dividends are the distributions of profit that a corporation pays to its shareholders. Dividends are most frequently distributed as cash, but they may also come in the form of stocks, stock options, debt payments, property, or even services. This type of income is usually reported on Form 1099-DIV to the IRS and you. You will typically receive this form if you receive dividends totaling $10 or more during a tax year. The form reports the dividends from a given financial institution, any applicable capital gains distributions, and taxes withheld, if any.
If you are wondering whether or not it is taxable: yes, any dividends received are considered taxable income and you will pay taxes on them when you file your next tax return. Most states tax dividend income; there are seven states which do not since they don't have an income tax code: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
Payments from mutual funds may also be dividends. A mutual fund is an investment company that buys and sells assets to earn profit for itself and its investors. The portions of the profit passed on to investors are dividends, unless the assets were held long enough for the profits to be considered capital gains.
Partnerships and S-corporations may also pay out dividends. Some distributions from trusts and estates can also be considered dividends.
When you invest in a corporation, mutual fund, or partnership, you may receive these dividends monthly, quarterly, or annually. Typically, most of these payments are made quarterly. At the end of a given year, a company will report their dividend yield, which is a simple ratio of its annual dividends-per-share compared to the current share price as a percentage. For example, if a company pays an annual $1.25 dividend and their stock price is $120, then their yield is 1.04%. Investors can use this to determine the potential risks and perks of investing in a particular stock.
When reporting dividends on your current tax year return, the eFile App will help input your information and handle any complicated math.
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Types of Dividends and Tax Rates
When you receive dividends for your investment or investments, this income is taxable and will need to be filed with your income tax return for that year. There are two types of dividends, both of which are taxed differently:
- Ordinary dividends are the most common type of dividend and are usually paid out from the earnings of a corporation. Generally, any dividend that is paid out from a common or preferred stock is an ordinary dividend unless otherwise stated. Ordinary dividends are taxed as ordinary income so you can expect to pay taxes at your regular income tax rate. Depending on your income level, you can pay anywhere from 10% to 37% on your ordinary dividends.
- Qualified dividends are dividends that meet the requirements to be taxed as capital gains. Under current law, qualified dividends are taxed at a 20%, 15%, or 0% rate, depending on your tax bracket. See the capital gains page for details on current, past, and future tax rates for reporting gains or losses.
All dividends are taxable and this income must be reported on an income tax return, including dividends reinvested to purchase stock. If you received dividends totaling $10 or more from any entity, then you should receive a Form 1099-DIV stating the amount you received. If you received dividends from a trust, estate, or S-corporation, then you should also receive a Schedule K-1 which will tell you how much of the dividends are taxable to you. See how to add a Schedule K-1 to your 1040 tax return on eFile.com.
If you don't receive either form, but you did receive dividends in any amount, then you should still report your dividend income on your tax return. Keep track of your investments through a journal or log to have the information handy. Then, prepare and e-file your current tax year taxes with eFile.com. The app will ask you about any dividends you may have received and help you report the information properly.
Report Dividend Income on a Tax Return
Dividends are reported to you on Form 1099-DIV and the eFile Tax App will include this income on Form 1040. If the ordinary dividends you received total more than $1,500, or if you received dividends that belong to someone else because you are a nominee, then Schedule B will be included - eFileIT. See information on capital gains taxes and capital loss deductions.
For more information, read this IRS publication on Capital Gains and Losses.
Use our free tax help tools, including our tax refund calculator, to estimate your taxes or determine eligibility for tax credits. Get your taxes done with eFile.com; the app will help select and complete any applicable tax forms, report information, determine any tax deductions, and report dividends and gains properly.
Why prepare your taxes with eFile.com?
Stocks and Taxes
If you invest in the stock market during the year, you may have received dividends for your investments as described above. Stocks are a form of investment that investors and common taxpayers can use to generate passive income. Any income generated from sales of stocks or assets is taxable income which needs to be reported on your tax return so capital gains and losses can be assessed.
The broker from the website, app, or other platform you used to invest will issue you a 1099-B by January 31 following a given tax year. Use this information on your eFile account so taxes can be calculated for you.
Stocks are only reported when you sell the asset, meaning you do not have to report the buying of a stock unless you sell another to do so. You can avoid paying taxes on your capital gains by deducting your losses, finding other tax deductions, or by donating stocks to charity.
Invest in stocks to maximize your passive income. Sign up for and download a brokerage platform that works for you and buy shares in companies that are expected to make profit. Verify your information to sign up and create the account to use the brokerage to make these investments. At the end of the year, finalize any trades or purchases you wish to include on your taxes for that year. Keep any shares in which you expect to grow to increase your investment income.
Many public companies pay their investors dividends, so if you own stock in a company that does so, you should expect to get both a 1099-B and a 1099-DIV. You can prepare your taxes with both of these forms in your eFile account.
Take control of your personal life, finances, and taxes: follow the tips on this page and keep up with tax planning for next year. You can use this free 2024 Tax Estimator to get a high-level understanding of your taxes.
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