Your inheritance of some dividend-paying stock shares may be adding a nice chunk of change to your annual income. Like almost every form of income, Uncle Sam will want his share of the dividends you receive. You claim the dividends and pay the taxes on your regular income tax return. If you will earn enough dividends so that writing a check to pay the taxes are an issue, you need to plan ahead so you can cover the tax bill.
Shares Transferred to You
You become responsible for the taxes on dividends from inherited stock as soon as the shares have been transferred into your name. The executor handling the estate will let you know how and when the transfer will be handled. Before the shares are officially registered to your name, the estate is responsible for paying tax on the dividends paid by the shares. The stock can be transferred as paper certificates with the ownership changed to your name or in electronic form and transferred to a brokerage account you own.
Declaring Dividend Income
Once the inherited shares are in your name, the dividends paid are another form of income that you must include on your tax return. You will receive one or more Forms 1099-DIV each year listing the amounts of dividends you received. Copy the 1099 values to the appropriate places on your tax return, and the tax you owe will be added into your total income tax for the year. Some good news is that the dividends from corporations fall into the "qualified" category. Your tax rate on qualified dividends will be less than your regular income tax rate.
Setting Aside Money
In most cases, there is no tax withholding from stock dividends. When you file taxes, you may need to send extra money to the IRS to cover the extra taxes the dividends add to your tax bill. If you are earning a significant amount of dividends, you may want to set aside a portion of each dividend payment so that you have the cash when it is time to file and pay your taxes. The maximum tax rate on qualified dividends is 20 percent, so if you put that portion of the dividends you receive into a savings account, you will have the money available when it is time to write the check to the IRS.
Paying Estimated Taxes
Another way to cover the tax payments on your dividend earnings is to pay estimated taxes to the IRS. The tax agency has a system in place where you can send in quarterly estimated tax payments using a Form 1040-ES, "Estimated Tax for Individuals," or send in money electronically. Estimated tax payments are due in April, June, September and January. Although there is some flexibility on the rules, if you expect to owe more than $1,000 in tax on your dividend earnings, the best course is to set up estimated tax payments.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.