Are Dividends Taxable?

Dividends are some of the most popular investment vehicles, but you may be surprised to learn that not all dividends are taxed the same.

The IRS has a classification for different types of income and dividend payments fall into two categories. Ordinary dividends are taxable at your marginal tax rate, while qualified dividends receive preferential treatment, and capital gains rates apply instead.

Are Dividends Taxable? Yes, Dividend income is taxable, and the amount of tax you owe on your dividends depends upon if the dividends are “qualified” or not. If you own any stock that generates you some income and receives a quarterly dividend (in cash or reinvested), it’s going to be a taxable dividend income.

You can determine whether or not your dividend is ordinary or qualified by reading the post below!

Dividend income is taxable, and it may be taxed in a variety of ways depending on the type of dividends received.

The tax rate for dividends depends on whether they are qualified or nonqualified.

Dividends from foreign companies that qualify for reduced rates, as well as qualifying dividends paid by US firms, are taxed at a long-term capital gains rate.
Ordinary, nonqualified, or unrecouped dividends (such as those paid by real estate investment trusts) are taxed at the individual’s regular rate.

If we look into explanation the Taxable dividends are taxed in one of two ways: Qualified Dividends and Unqualified Dividends. The type of dividend received determines how much tax is paid on the dividend itself, and when it must be paid. The third amount of tax that may be due is an unrecaptured section 1250 gain as a result of the disposition of some types of Dividend Equivalents.

Qualified Dividends

These are taxed at a maximum rate of 15%. These dividends represent returns from stock investments and must be shown on the appropriate form 1099-DIV issued by the brokerage firm which handled the investment. The keyword in understanding qualified dividends is ‘maximum’. The amount of tax due on the dividends is no more than 15% of their value, even if they are short-term capital gains.

To be eligible for the lower tax rate, a dividend must be paid by one of the following:

A company based out of the U.S.

A company that is in possession of the U.S.
A non-resident company that is covered by a tax treaty between the United States and another country
Stock from a foreign firm that can be readily sold on a major American stock market

Unqualified Dividends

These are taxed at a rate that varies depending upon one’s income tax bracket. It may be as low as 0% but no higher than 20% of the total received. Unlike qualified dividends, unqualified dividends are subject to both federal and state tax when they are received.

Ordinary dividends that are not considered qualified can be received from a U.S. corporation, a foreign corporation, real estate investment trusts, and certain bank-type organizations. Taxation of these dividends is based upon an individual’s current tax bracket as the tax rate varies from 0%-39.6%.

Calculating Taxes on Dividends

Ordinary Dividend Tax

Dividends that are not extraordinary are taxed as ordinary income. If your marginal tax rate is 25%, you’ll pay a 25% tax on your annual ordinary dividends.

Multiply your ordinary dividends by your tax rate to calculate your tax obligation. For example, If you’re in the 25 percent tax bracket and earn $3,000 in dividend income, you’ll owe $750 in federal taxes on them.

Qualified Ordinary Dividend Tax

Qualified ordinary dividends are taxed at a lower rate than regular dividends.
Qualified dividends are not taxed if your marginal income tax rate is under 25%.

If your marginal rate is 25% or greater, you’ll pay the same tax rate on long-term capital gains as you would if it were short-term capital gains. i.e 15%

Qualified Dividend Tax Rates for 2022

Rate	Single	Married filing jointly	Married filing separately	Head of household
0%	$0 – $41,675	$0 – $83,350	$0 – $41,675	$0 – $55,800
15%	$41,676 – $459,750	$83,351 – $517,200	$41,676 – $258,600	$55,801 – $488,500
20%	$459,751+	$517,201+	$258,601+	$488,501+

Non-Qualified Dividend Tax Rates for 2022

Rate	Single	Married filing jointly	Married filing separately	Head of household
10%	$0 – $10,275	$0 – $20,550	$0 – $10,275	$0 – $14,650
12%	$10,276 – $41,775	$20,551 – $83,550	$10,276 – $41,775	$14,651 – $55,900
22%	$41,776 – $89,075	$83,551 – $178,150	$41,776 – $89,075	$55,901 – $89,050

How to File Dividends Income on Your Federal Taxes

Dividends are shown on Form 1099-DIV, and the eFile tax app will include them on Form 1040. If your ordinary dividends exceed $1,500, or if you received dividends that belong to someone else because you are a nominee, then Schedule B must be completed.

For Qualified Dividends

If you receive qualified dividends, they’re reported on your Form 1040 and included in your other income. On page 1 of Form 1040, add the amount from Box 1a of all your Forms 1099-DIV. For more information on what qualifies as a qualified dividend read this article.

For Nonqualified Dividends

Nonqualified dividends are included with your other income but don’t get the benefit of the reduced tax rates for qualified dividends. On page 1 of Form 1040, add the amount from Box 1b of all your Forms 1099-DIV.

Figure out any capital gains or losses you had during the year by subtracting any long-term losses from any long-term gains. Then add that amount to your other income (the dividend income you already included). Report the total on line 9b of Form 1040.

If you received dividends eligible for reduced tax rates but didn’t receive a rate reduction because they were paid by an investment that isn’t listed on an IRS-approved list, the dividends are taxed at ordinary rates. However, rather than reporting these dividends directly to you, they are reported to you as proceeds from transactions reported on Form 8949.

Conclusion:

As you can see, dividends income is taxable. It’s important to know the difference between qualified and unqualified dividend payments so that you don’t get taxed on money that doesn’t need to be taxed. If your company pays out a quarterly cash dividend or an annual reinvested dividend, it will generate tax liability for you as its shareholder.

The amount of taxes owed depends upon whether or not the dividend was qualified or not at the time it was received by shareholders. Be sure to consult with a professional before taking any action based on conclusions