Distributed Earnings and Qualified Dividends
Distributed earnings are a type of investment income earned from stocks and investment funds that contain stocks. They are a share of a company’s profits paid out to investors. This income is subject to taxation.
Capital Gains Tax Rates for Qualified Dividends
When you receive dividends from an investment, you must pay capital gains tax on them. You will fall into the 0% long-term capital gains tax bracket if your income meets the following limits for the 2022 tax year, which is the return you file in 2023:
Less than $41,675 if you are single
Less than $83,350 if you are married filing jointly with your spouse
Less than $55,800 if you qualify as a head of household
Other Types of Distributed Earnings
Ordinary distributed earnings are subject to the same ordinary income tax rates as wages or other earned income. You may also receive dividends from a trust, estate, corporation, or partnership. The transaction still represents earnings. You must report the value on your tax return, regardless of whether the corporation or partnership pays you in cash, stock options, or tangible property. You should receive a Schedule K-1 for earnings from these sources.
Dividend Income Reporting: Form 1099-DIV
Form 1099-DIV is issued to investors by mutual fund companies, brokers, and corporations when $10 or more is paid as distributed earnings during the year. Form 1099-DIV reports distributed earnings in the following boxes:
Box 1a: Ordinary dividends reflecting the total amount of dividends paid to you
Box 1b: Qualified dividends (the part of total dividends that qualifies for the favorable capital gains tax rates)
Box 3: Non-dividend distributions, which are a return of capital not subject to tax
Reporting Dividend Income on Form 1040
Report dividend income on your 2022 tax return – Form 1040 – in the following places:
Report ordinary dividends on line 3b
Report qualified dividends on line 3a
You can use the qualified dividends and capital gains tax worksheet in the Form 1040 instructions to calculate the tax on qualified dividends at the preferred tax rates.
Non-dividend distributions can reduce the stock basis by the amount of the distribution.
You must report dividend income on your tax return even if you did not receive a Form 1099-DIV for any reason. The earnings are taxable regardless. Reporting is required even if you reinvest them and purchase more stocks.
Using Schedule B
Schedule B is an additional tax form used to list interest and dividends from multiple sources. It is required if you have more than $1,500 in interest and dividends.
Additional Medicare Tax
Distributed earnings can also lead to an additional Medicare tax. This is in addition to any income tax you may owe on your earnings.
You must pay 0.9% on net investment income for this Medicare tax if you are married filing jointly and your modified adjusted gross income (MAGI) is $250,000 or more. You must pay it if you are married filing separately and your MAGI is more than $125,000. The income threshold for all other filers is $200,000.
Net Investment Income Tax
The net investment income tax is 3.8%. It applies to the lesser of your net investment income thresholds or the same income thresholds for the additional Medicare tax.
All taxable dividends are investment income, even if taxed at ordinary rates.
Repeating
Taxes
Tax laws change periodically. You should always consult a tax professional for the latest advice. The information in this article is not intended as tax advice. It is not a substitute for tax advice.
Frequently Asked Questions (FAQs)
How are dividends taxed by states?
Most states tax dividends as ordinary income, so you will pay the same rate on dividends as you do on the rest of your income. New Hampshire taxes all dividends at a 5% rate, regardless of income level. However, this tax is being phased out and is set to be eliminated entirely by January 1, 2027.
How often are dividends paid?
Apart from Real Estate Investment Trusts (REITs), most companies have a lot of freedom in how and when they choose to distribute dividends and how much will be paid. Many companies that pay dividends do so quarterly. But this is not mandatory. They can change their plans at any time until dividends are announced.
What is Section 199A dividends?
Section 199A dividends are the dividends paid by Real Estate Investment Trusts (REITs). Individuals can deduct up to 20% of qualified dividends from domestic REITs and income from public partnerships.
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Source: https://www.thebalancemoney.com/dividends-on-tax-returns-3193086
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