Introduction
Dividends are payments made by corporations to shareholders as a return on investment. The IRS categorizes dividends into ordinary dividends and qualified dividends, which are taxed at different rates.
This guide explains the difference between qualified and ordinary dividends, how to report them on IRS Form 1040, and their impact on your tax liability.
Tax Code References for Dividends
- IRC § 61(a)(7) – Defines dividends as taxable income.
- IRC § 1(h)(11) – Provides reduced tax rates for qualified dividends.
- IRC § 301-316 – Governs corporate distributions and dividend taxation.
Relevant IRS Forms for Reporting Dividends
- Form 1099-DIV – Reports dividend income from stocks and mutual funds.
- Schedule B (Form 1040) – Required if total dividend income exceeds $1,500.
- Form 1040, Line 3a & 3b – Reports qualified and ordinary dividends.
What Are Ordinary Dividends?
Ordinary dividends are distributions from corporate earnings that are fully taxable at regular income tax rates.
Characteristics of Ordinary Dividends
- Paid by corporations and mutual funds.
- Reported on Form 1099-DIV, Box 1a.
- Taxed as ordinary income based on your marginal tax rate.
What Are Qualified Dividends?
Qualified dividends receive preferential tax treatment and are taxed at lower capital gains tax rates.
Requirements for Qualified Dividends
- The dividend must be paid by a U.S. corporation or qualified foreign company.
- The stock must be held for at least 60 days during the 121-day holding period.
- Reported on Form 1099-DIV, Box 1b.
Tax Rates for Qualified Dividends (2024)
- 0% if taxable income is $0 – $47,025 (single filers).
- 15% if taxable income is $47,026 – $518,900 (single filers).
- 20% if taxable income exceeds $518,900 (single filers).
Step-by-Step Guide to Reporting Dividends on IRS Form 1040
Step 1: Gather Your Form 1099-DIV
- Check Box 1a (Ordinary Dividends) and Box 1b (Qualified Dividends).
Step 2: Report Dividend Income on Form 1040
- Line 3b of Form 1040 – Enter total ordinary dividends (Box 1a from 1099-DIV).
- Line 3a of Form 1040 – Enter qualified dividends (Box 1b from 1099-DIV).
Step 3: File Schedule B (Form 1040) If Required
- If total dividend income exceeds $1,500, list each dividend source on Schedule B.
Step 4: Apply the Correct Tax Rate
- The IRS automatically calculates the lower tax rate for qualified dividends.
Step 5: Submit Your Tax Return
- Attach Schedule B if required and verify dividend classification is correct.
Example Scenarios for Reporting Qualified and Ordinary Dividends
Example 1: Ordinary Dividends from Mutual Funds
- Sarah received $3,500 in dividends from a mutual fund.
- She received Form 1099-DIV, showing $3,500 in Box 1a.
- Sarah reports $3,500 on Line 3b of Form 1040 and files Schedule B.
Example 2: Qualified Dividends from a U.S. Corporation
- Mark received $2,000 in dividends from Apple stock.
- His Form 1099-DIV shows $2,000 in Box 1b.
- Mark reports $2,000 on Line 3a of Form 1040 and benefits from the 15% qualified dividend tax rate.
Example 3: Mixed Dividend Income
Lisa received $5,000 in total dividends, with $3,000 as ordinary dividends and $2,000 as qualified dividends.
She reports $5,000 on Schedule B, $3,000 on Line 3b, and $2,000 on Line 3a of Form 1040.
Common Mistakes to Avoid
- Reporting qualified dividends as ordinary dividends – Qualified dividends receive lower tax rates.
- Forgetting to check holding period requirements – Stocks must be held for 60 days within the 121-day period to qualify.
- Failing to report dividends under $10 – All dividend income must be reported, even if Form 1099-DIV is not issued.
IRS Compliance Requirements
- Report all dividend income on Form 1040, Lines 3a & 3b.
- File Schedule B if total dividends exceed $1,500.
- Ensure stocks meet the holding period for qualified dividend treatment.
- Retain Form 1099-DIV records for IRS verification.
Conclusion
Qualified dividends receive favorable tax rates, while ordinary dividends are taxed at regular income tax rates. Properly classifying and reporting dividend income helps maximize tax savings.
For expert tax guidance on dividend reporting, consult Anshul Goyal, CPA EA FCA, a Certified Public Accountant and IRS compliance expert.
FAQs
1. How do I know if my dividends are qualified?
Check Box 1b on Form 1099-DIV and ensure you held the stock for at least 60 days.
2. Are REIT dividends qualified?
No, most Real Estate Investment Trust (REIT) dividends are ordinary dividends.
3. What happens if I sell my stock before 60 days?
The dividend is reclassified as an ordinary dividend and taxed at higher rates.
4. Do all U.S. stocks pay qualified dividends?
No. Some companies pay ordinary dividends that do not qualify for lower tax rates.
5. Where do I report foreign dividends?
Foreign dividends are reported on Schedule B and may qualify for the Foreign Tax Credit.
About Our CPA
Anshul Goyal, CPA EA FCA, is a Certified Public Accountant and IRS compliance expert specializing in dividend income taxation, investment reporting, and IRS compliance.
For personalized tax assistance, schedule a consultation with Anshul Goyal, CPA EA FCA today.