How to File Dividends on Your Tax Return

Dividends are a portion of a company’s earnings distributed to shareholders. While a regular source of income, they carry tax obligations requiring careful reporting to the Internal Revenue Service (IRS). Understanding how to account for dividends on your tax return is important for managing finances and ensuring tax compliance. This involves identifying dividend types and using specific IRS forms.

Understanding Taxable Dividends

From a tax perspective, dividends are categorized primarily into two types: ordinary and qualified. The distinction between these types is important because they are subject to different tax rates. Ordinary dividends are taxed at your regular income tax rates, similar to wages or salaries, which can range from 10% to 37% for federal taxes.

In contrast, qualified dividends receive a more favorable tax treatment. They are taxed at the lower long-term capital gains rates, which are typically 0%, 15%, or 20%, depending on your overall taxable income. To be considered qualified, a dividend must meet specific IRS criteria, including being paid by a U.S. corporation or a qualified foreign corporation. The stock must generally be held for more than 60 days during a 121-day period that begins 60 days before the ex-dividend date. All dividends are initially ordinary dividends, then categorized as qualified or nonqualified based on IRS requirements for lower tax rates. This classification is crucial for determining your final tax liability on these investment earnings.

Preparing Your Dividend Information

Before you can report your dividend income, you need to gather the necessary documentation. The primary document for this purpose is Form 1099-DIV, Dividends and Distributions, which your brokerage firm, mutual fund company, or other financial institution typically sends to you by the end of January each year. This form provides a detailed breakdown of the dividends you received during the previous tax year.

Several boxes on Form 1099-DIV are relevant for tax reporting. Box 1a shows the total amount of ordinary dividends you received, which includes all dividend income. Box 1b specifies the portion of Box 1a that qualifies for the lower capital gains tax rates, indicating your qualified dividends. Box 2a reports any total capital gain distributions, which are typically from mutual funds or real estate investment trusts (REITs) and are also taxed at long-term capital gains rates.

Even if you do not receive a Form 1099-DIV, perhaps because your total dividends from a single payer were below the $10 reporting threshold, you are still responsible for reporting all dividend income. In such cases, you can use your year-end brokerage statements or other investment statements to determine the amounts of ordinary and qualified dividends.

Reporting Dividends on Your Tax Return

After compiling your dividend information, typically from Form 1099-DIV, report these amounts on your federal income tax return. For most taxpayers, dividend income is reported on Schedule B (Form 1040), Interest and Ordinary Dividends, if their total ordinary dividends exceed $1,500. This schedule is used to list the payer’s name and the amount of ordinary dividends received.

If your total ordinary dividends are $1,500 or less, you generally do not need to file Schedule B and can report the income directly on Form 1040. Your total ordinary dividends from Box 1a of Form 1099-DIV are reported on Form 1040, Line 3b. The amount of qualified dividends from Box 1b of Form 1099-DIV is reported on Form 1040, Line 3a.

When completing Schedule B, you will list each payer of ordinary dividends and the respective amounts in Part II. The total of these amounts from Schedule B then flows to Form 1040, Line 3b. The IRS uses a Qualified Dividends and Capital Gain Tax Worksheet, found in the Form 1040 instructions, to calculate the tax on qualified dividends at the lower capital gains rates.

Addressing Specific Dividend Situations

One common situation involves reinvested dividends, where instead of receiving a cash payout, your dividends are automatically used to purchase additional shares of the same investment. Even though you do not receive cash, these reinvested dividends are still considered taxable income in the year they are received and must be reported.

Dividends received from foreign companies are also taxable in the U.S., regardless of the country of origin or currency. You may be able to claim a foreign tax credit on Form 1116 if you paid taxes to a foreign government on these dividends, which helps prevent double taxation.

Dividends distributed by mutual funds and Exchange-Traded Funds (ETFs) are treated similarly to stock dividends. Mutual funds often distribute both ordinary dividends and capital gain distributions, which are reported on Form 1099-DIV. Capital gain distributions from mutual funds are always reported as long-term capital gains, regardless of how long you owned the fund shares.

Finally, nominee dividends occur when you receive a Form 1099-DIV for dividends that actually belong to another individual or entity. This can happen with joint accounts where your name is listed first. If you receive such a form, you must report the full amount of dividends on your return, then subtract the portion belonging to the other owner as a “nominee distribution” on Schedule B. You are also typically required to issue a Form 1099-DIV to the actual owner for their share.