If you own investments that pay dividends and you hold them in a taxable brokerage account, you’ll likely receive a Form 1099-DIV during tax season. However, not all dividends are taxed the same. Let’s take a closer look at how dividends are taxed and how that income is reported to you.
What are dividends?
Dividends are distributions of earnings from a company to its shareholders. These distributions can be in cash or in the form of additional shares. If the stock that issued the dividends is held within a taxable brokerage account, those dividends will be taxable income to you in the tax year the dividend occurred. Generally, dividends are reported to you and to the IRS on the Form 1099-DIV or part of a consolidated 1099 that includes all tax information within a single document.
Types of dividends
The tax code has its own way of talking about dividends that can sometimes be confusing. From a tax perspective, all dividends are initially considered "ordinary dividends." Then dividends get subdivided into two groups: qualified dividends and nonqualified dividends. No matter the type of dividend, they are all considered current year taxable income—unless the stock is held within a tax-advantaged account like an IRA or 401(k).
Qualified dividends get their name because they can qualify for a special lower tax rate. There are several requirements that must be met for a dividend to be considered qualified, such as:
- The stock issuer must be a domestic company or a qualified foreign corporation.
- You must own the stock for more than 60 days during the 121-day period that starts 60 days before the ex-dividend date.
- For some preferred stocks, the shares must be held for longer than 90 days out of the 181-day period that begins 90 days before the ex-dividend date.
If the dividend is qualified, it’ll generally be taxed at the lower long-term capital gains tax rates, depending on your federal tax bracket of 0%, 15%, or 20%. Fortunately, the issuers of the Form 1099-DIV are required to report to you if the dividends are qualified or not. However, if you’re not sure if a dividend is qualified, we recommend working with a tax advisor to properly report that income on your tax return.
Nonqualified dividends are basically any dividend that is not a qualified dividend. Nonqualified dividends are taxed at the higher ordinary income tax rates, which range from 10% to 37% for federal taxes.
Dividends can also be subject to other taxes. If your modified adjusted gross income is over certain levels, the federal 3.8% net investment income tax could also apply. And depending on where you live, state taxes could also be collected on that dividend income.
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https://www.schwab.com/learn/story/understanding-1099-div-tax-form