Federal Taxation of Dividends
Dividends are a type of investment income that’s generated from stocks and mutual funds that contain stocks. They represent a share of corporate profits paid out to investors, and they’re taxed when they’re paid out. If your income includes dividends, this presents some special considerations at tax time.
What Is a Qualified Dividend?
Dividends can be taxed either at ordinary income tax rates or at the preferred long-term capital gains tax rates. Dividends that qualify for the lower long-term capital gains tax rates are called qualified dividends.
According to the Internal Revenue Service, an investor “must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date” to be considered a qualified dividend.
But this holding period can be longer in the case of preferred stock, which must be held for 90 days or more during a 181-day period that begins 90 days before the ex-dividend date. This rule applies if the dividends result from time periods exceeding 366 days.
Beginning with the 2018 tax year and going forward through at least 2025, you’ll fall into the 0 percent long term capital gains tax rate for qualified dividends if your income is $38,600 or less if you’re single, $77,200 or less if you’re married and filing a joint return, or $51,700 or less if you qualify as head of household
The new 15 percent tax bracket kicks in and applies to incomes of up to $425,800 for single filers, $452,400 for head of household filers, and $479,000 for married filers of joint returns. Only those with incomes in excess of these amounts are faced with the 20 percent capital gains tax rate.
These figures are indexed for inflation so they can be expected to increase incrementally each year through at least 2025.
Other Types of Dividends
You might also receive dividends from a trust or an estate, from an S-corporation, or from a partnership. Regardless of whether the corporation or partnership pays you in cash, stock options, or tangible property, the transaction still represents dividends and the value must be reported on your tax return.
You should receive Schedule K-1 for dividends from these sources. All other dividends are reported to investors on Form 1099-DIV.