Posted by LLOYD J CAZES CPA

Federal Taxation of Dividend Income

Federal Taxation of Dividend Income

Dividends are a type of investment income that is stock generated, and also from mutual funds containing stocks. They stand as a taxable share of corporate profits that are paid out to the investor. If your income involves dividends, this presents some unique concerns at tax time. 

What Is a Qualified Dividend? 

They are dividends that can be taxed either at ordinary income tax rates or at the ideal long-term capital gains tax rates. Dividends that are eligible for the lower long-term capital gains tax rates are known as qualified dividends.

An investor must have held or have owned the stock unhinged for a minimum of 61 days during the 121-day period that commences 60 days before the ex-dividend date to be a qualified dividend, according to the IRS. But this holding period can be extended in the case of ideal stock. The assets must be held for a minimum of 91 days during a 181-day period that begins 90 days before the ex-dividend date. This rule applies if the dividends result in from periods beyond 366 days. 

Tax Treatment of Dividends in 2018

Changes have occurred to the tax treatment of qualified dividends around 2017. They were taxed at either rate of 0, 15% or 20 % through 2017, determined by your steady income tax bracket. Jobs Act (TCJA) brought about some changes up effective January 2018.

The rates are kept at 0, 15% and 20 %, but currently, long-term capital gains have their tax brackets—at a minimum through 2025, the potential expiration of the TCJA.  With the 2018 tax year, you will fall into the 0% long term capital gains tax rate for eligible dividends if your income is $38,600 or less for the single, $77,200 or less for the married and you file a joint return with your spouse or $51,700 or less for the head of household.

The novel 15 % tax bracket begins and applies to incomes more than the 0% thresholds up to $425,800 for the single filers, $452,400 for the head of household filers, and $479,000 for married filers that filed joint returns in 2018.

Capital Gains Tax Rates in 2019

These long term rates have not changed in 2019, but the income thresholds for each have changed be at pace with inflation. The figures are indexed for inflation so they can be expected to rise every year incrementally through at least 2025.

The 0% mark are set at $39,375 for single filers in the 2019 tax year, $52,750 for heads of household  and $78,750 for married taxpayers who file joint returns. The 15% income limits increase to $434,550, $461,700, and $488,850 respectively.

Only those having incomes above the 15% thresholds are faced with the 20% capital gains tax rate in both the year 2018 and 2019.

Other Types of Dividends

Your dividends are taxed the same way and at equal rates as your wages, salary, or other earned income if they are not seen as qualified.

You might also get dividends from a trust or an estate from a partnership, or an S-corporation. Irrespective of whether the corporation or partnership pays you in cash, tangible property, stock options, or the transaction still represents dividends, and the equivalent value must be reported on your tax return. 

Reporting Dividend Income

Mutual fund companies issues Form 1099-DIV, brokers, and corporations to investors when $10 or more in dividend income is paid out within the year. Form 1099-DIV reports information on dividends in the following places:

Box 1a: Ordinary dividends showing the sum of dividends paid to you

Box 1b: Qualified dividends   the portion of total dividends that are eligible for the preferred capital gains tax rate

Box 3: Non-dividend distributions, these are a nontaxable return of capital

Using Schedule B

Schedule B is an additional tax form used to make a list of interest and dividend income from many sources.  It is required to use Schedule B if you have over $1,500 in interest income and dividends.

It can be helpful to make use the form totally up to your  dividend and interest for reporting on your Form 1040 even if you are not expected to file it with your tax return. 

Other Taxes—the Additional Medicare Surcharge 

Dividend income can also be speedy the Additional Medicare Tax, which has been put in place since the 2013 tax year. This tax is a plus to any income tax you might owe on your dividends.

If you are single having a modified adjusted gross income (MAGI) of $200,000 and above or if you are married and your MAGI is more than $250,000, you are required to pay an extra 0.9% of your net investment income toward this Medicare tax. The income mark is $125,000 for married that file a separate return. 

LLOYD J CAZES CPA
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