Taxes on Dividends

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.

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.

What Are Ordinary and Qualified Dividends?

There are 2 types of dividends:

    • 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.
    • 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.

What Taxes Do I Have to Pay on Dividends?

Ordinary dividends and qualified dividends each have different tax rates:

    • Ordinary dividends are taxed as ordinary income.
    • Qualified dividends are taxed at a 20%, 15%, or a 0% rate, under current law. For more information, see capital gains.

Do I Have to Report All Dividend Income?

All dividends are taxable and all dividend income must be reported. If you received dividends totalling $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.

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.

Dividends reinvested to purchase stock are still taxable. 

How Do I Report Dividend Income on My Tax Return?

Dividends are reported directly on Form 1040 or Form 1040A (look here if you are not sure which Form 1040 to file). 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 you must also file Schedule B.

Reporting dividend income is easy when you prepare your return on efile.com. The online software will select the correct tax forms for you and make sure that they are filled out correctly.

Related Links

Information on Capital Gains Taxes and Capital Loss Deductions

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