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.
FAQs
The tax rate for dividends depends on whether they are qualified or nonqualified. Taxpayers will receive a Form 1099-DIV for dividends above $10. This form is also sent to the IRS on the taxpayer's behalf. Taxpayers may need to complete Schedule B to support Form 1040 if they earn a certain amount of dividends.
How are dividends reported to IRS? ›
To report your dividends on your tax return and pay the applicable taxes, you include the appropriate amounts on Form 1040 and fill out the related line items on Schedule B if required. TurboTax can fill out the proper forms for you by asking questions about dividends you receive throughout the tax year.
What are dividends and how are they taxed? ›
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 you report dividends as income? ›
Assessable income includes both dividends and net capital gains. Your taxable income is the total of your assessable income less allowable deductions. Allowable deductions are expenses you incur in producing assessable income.
How is taxable amount of dividends calculated? ›
Types of Dividends
If your dividend is eligible, you must add back 38% of your received dividend and deduct 15.0198% from the gross taxable amount as a federal dividend tax credit. Other than eligible dividends, there are those where the corporation has paid a lower tax rate.
What happens if you don't report dividends to IRS? ›
If you receive a Form 1099-DIV and do not report the dividends on your tax return, the IRS will likely send you a CP2000, Underreported Income notice. This IRS notice will propose additional tax, penalties and interest on your dividends and any other unreported income.
Is dividend income taxable? ›
Yes, dividend income is taxable in India. Are there any expenses which are allowed as a deduction from dividend income under the head “income from other sources”? Yes, in the case of dividends, the amount paid as interest on any monies borrowed to invest in the shares or mutual funds is allowable as a deduction.
How to avoid paying taxes on dividends? ›
You may be able to avoid all income taxes on dividends if your income is low enough to qualify for zero capital gains if you invest in a Roth retirement account or buy dividend stocks in a tax-advantaged education account.
Are dividends taxed when declared or paid? ›
Investors pay taxes on the dividend the year it is announced, not the year they are paid the dividend.
Are dividends taxed higher than capital gains? ›
Capital gains are charged with high tax amounts, while dividends have low taxes. Investors who get dividends vs. capital gains are applicable to pay tax on these gains. The tax on net capital gains depends on the asset being sold, whether long-term or short-term.
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.
What IRS form is used to report dividend income? ›
About Form 1099-DIV, Dividends and Distributions | Internal Revenue Service.
Are dividends recorded as income? ›
Cash or stock dividends distributed to shareholders are not recorded as an expense on a company's income statement. Stock and cash dividends do not affect a company's net income or profit. Instead, dividends impact the shareholders' equity section of the balance sheet.
How much dividend income is tax free? ›
Qualified Dividend Taxes
| Dividend Tax Rate, 2022 |
|---|
| Filing Status | 0% Tax Rate | 20% Tax Rate |
|---|
| Single | $0 to $41,675 | $459,751 or more |
| Married Filing Jointly | $0 to $83,350 | $517,201 or more |
| Married Filing Separately | $0 to $41,675 | $258,601 or more |
1 more rowBox 1a of your 1099-DIV will report the total amount of ordinary dividends you receive. Box 1b reports the portion of box 1a that is considered to be qualified dividends. If your investment makes a reportable capital gain distribution to you, it will be reported in box 2a.
Is there a limit on dividends per year? ›
There's no limit, and no set amount – you might even pay your shareholders different dividend amounts. Dividends are paid from a company's profits, so payments might fluctuate depending on how much profit is available.
Do all dividends need to be reported to the IRS? ›
If you had over $1,500 of ordinary dividends or you received ordinary dividends in your name that actually belong to someone else, you must file Schedule B (Form 1040), Interest and Ordinary Dividends. Please refer to the Instructions for Form 1040-NR for specific reporting information when filing Form 1040-NR.
Do dividends have to be reported to IRS? ›
If you had over $1,500 of ordinary dividends or you received ordinary dividends in your name that actually belong to someone else, you must file Schedule B (Form 1040), Interest and Ordinary Dividends. Please refer to the Instructions for Form 1040-NR for specific reporting information when filing Form 1040-NR.
How are dividends reported on 1099? ›
Box 1a of your 1099-DIV will report the total amount of ordinary dividends you receive. Box 1b reports the portion of box 1a that is considered to be qualified dividends. If your investment makes a reportable capital gain distribution to you, it will be reported in box 2a.
Are dividends taxable when declared or paid? ›
The income tax consequences are that a final dividend is usually taxable by reference to the date the dividend is declared, whereas an interim dividend is taxable when actually paid.
