Dividends are a portion of a company's profits paid to shareholders—and come tax season, they are reported and taxed depending on a number of factors.
Key Takeaways
- Dividends are a portion of a company's profits paid to shareholders that can sometimes create double taxation.
- Dividends can be ordinary and taxed at the same rate as your income, or qualified and taxed at a lower capital gains rate.
- Companies paying dividends report them to shareholders using Form 1099-DIV, and individual shareholders report payouts to the IRS using Form 1040.
Public companies that sell stock pay dividends on a schedule, but they can pay these dividends at any time. A company can also pay a special or extra dividend in addition to regular dividends.
How Dividends are Taxed
How dividends are taxed depends on how they have been held by the recipient. There are two types of dividends—ordinary dividends and qualified dividends. Qualified dividends are eligible for a lower tax rate than ordinary income.
Ordinary dividends are taxable as ordinary income. That means they are added to your other tax return and taxed at the same rate as other income (your wages from a job, for example).
Qualified dividends that meet certain requirements are taxed at lower capital gain tax rates. The capital gains tax rate you pay depends on how long you keep the dividend and your income level. If you hold an asset like a dividend for more than one year before you dispose of it, your capital gain or loss is long-term.
Note
Dividends are reported to both the individuals receiving the payouts on Form 1099-DIV. This information is submitted on the individual's tax return on Form 1040.
For qualified dividends to get the maximum tax rate (20%), the dividends must meet several qualifications, including:
- The dividends must have been paid by a U.S. corporation or a qualified foreign corporation,
- The dividends cannot be deemed "non-qualified," and
- The dividends must have been held for a minimum amount of time.
Dividend Income Report - Form 1099-DIV
How you receive a report of dividends for your tax return depends on your business type or your personal return.
Companies paying dividends must provide shareholders receiving those dividends a report showing the amount paid to that shareholder for the year. The report is made for payments of more than $10 for the year on Form 1099-DIV.
A Look at Form 1099-DIV
Form 1099-DIV is for dividends and other distributions. In addition to the general information about payer and payee, the boxes applicable to dividends are:
- Box 1a is Ordinary Dividends
- Box 1b is Qualified dividends
- Box 2a is Total Capital Gain Distribution. This is the total long-term taxable capital gains from boxes 2b, 2c, and 2d.
- Box 4 is Federal Income Tax Withhold. Federal income tax isn't usually withheld from dividends. The exception is backup withholding for garnishments and other required withholding.
- Boxes 14-15 are used to report dividend income to the payee's state.
Dividends for Partners in Partnerships - An Exception
If you are a partnership, you may be required to report your share of any dividends your partnership business receives, even if the dividend hasn't been paid to you. (The partnership receives Form 1099-DIV in this case.) Your share of these dividends is usually reported on the Schedule K-1 you receive showing all of your income as a partner.
Entering Dividends on Your Tax Return
Ordinary Dividends. Enter the total of the dividends you received on all 1099-DIV forms during the year on Form 1040, line 3b. If you received over $1500 of ordinary dividends in the year, you must also file Schedule B Interest and Ordinary Dividends to list all dividends.
Qualified Dividends. Enter the total of all qualified dividends from all 1099-DIV forms on line 3a of your Form 1040.
Note
If you receive a 1099-DIV be sure to include it with the information you give your tax preparer or include it on your Form 1040. If you don't report this income, you could be subject to IRS penalties for underreporting your income for the year.
Dividends and "Double Taxation"
Double taxation refers to the fact that dividends are taxed twice. First, the dividends distributed by the corporation are profits (part of the business net income) and are not deductible. So the corporation pays corporate income tax on profits distributed to shareholders. Then, the shareholders pay income taxes personally on those dividends.
Note
Check with your tax and legal advisors before completing your tax return or making any decisions that could affect your taxes.
Frequently Asked Questions (FAQs)
What rates are dividends taxed at?
The rate at which income from dividends is taxed at depends on the type of dividend. Ordinary dividends are taxed at ordinary income tax rates that vary between 10% and 37% depending on your income. Dividends that meet a certain criteria are called qualified dividends. That includes being invested in the stock for more than 60 days during a 121 day period that begins 60 days prior to the dividend announcement. Qualified dividends are taxed at a lower rate (0%, 15%, or 20%) compared to ordinary income.
How are REIT dividends taxed?
Real-estate investment trusts (REITs) are obligated to pay out 90% of their taxable annual income as dividends to investors, however the tax treatment of those dividends depends on what kind they are. Ordinary dividends are taxed at ordinary income tax rates after taking a 20% deduction for pass-through income under the Tax Cut and Jobs Act. Dividends that are eligible to be classified as return of capital are not taxed. Other REIT dividends may be taxed at capital gains tax rates (long or short-term) depending on how long the REIT shares were held.
