Due to tax changes from the Tax Cut and Jobs Act, the information below references tax rates for tax years prior to 2018.
Video transcript:
Hello, I’m Jill from TurboTax, with important news for taxpayers who receive dividends on their stock and mutual fund investments.
If you purchase stock in a corporation or invest in a mutual fund that periodically pays dividends, the payments you receive throughout the year can provide you with some extra income. Though you must always report the dividend income on your tax return—it doesn’t always mean you will pay tax on it.
Whenever you receive dividend payments throughout the year, the corporation or mutual fund you receive it from must report the annual total to you on a 1099-DIV form. It’s extremely important that you keep track of the 1099-DIVs you receive for when you prepare your tax return.
Your 1099-DIV will have numbered boxes that correspond to various types of dividends and other payments you receive during the year. However, for purposes of determining how much tax you will pay on your dividends, you’ll want to focus on boxes 1a and 1b. And if amounts are reported in box 2a, those dividends are reported and taxed as long term capital gains.
Box 1a reports your total ordinary dividend income for the year, whereas, box 1b reports the amount of box 1a that are qualified dividends. If the amount you see in box 1b is zero, it means that all of the dividends you receive during the year will be taxed at the same rates as most of your other income, such as employment wages and the interest you earn in a bank account.
Qualified dividends, on the other hand, receive special tax treatment. Although the IRS never treats your dividend payments as capital assets, your qualified dividends are taxed at capital gains rates. As a result, you will pay either zero or 15 percent tax on the amount reported in box two—but this depends on what your highest tax bracket is.
- If the highest tax rate your taxable income is subject to is 10 or 15 percent, no tax is due on your qualified dividends.
- But if your highest rate of tax is 25 percent or more, you will pay a 15 percent tax on your qualified dividends.
Because the most you can be taxed on qualified dividends is 15 percent, you will always pay less tax than on unqualified dividends.
One last thing you should be aware of is that the IRS requires you to file a Schedule B with your tax return if the total of your annual dividend payments exceeds $1,500.
With TurboTax Live Full Service, a local expert matched to your unique situation will do your taxes for you start to finish. Or, get unlimited help and advice from tax experts while you do your taxes with TurboTax Live Assisted.
And if you want to file your own taxes, you can still feel confident you'll do them right with TurboTax as we guide you step by step. No matter which way you file, we guarantee 100% accuracy and your maximum refund.
