You get a good feeling when those dividend payments show up in your brokerage account or fund statement. But a little pain comes at the end of the year when you receive a Form 1099 listing those taxable dividends. Qualified dividends are taxable, but as of 2012, they do qualify for a lower tax rate than your other income (sometimes much lower).
Qualified dividends are cash dividends paid you by a U.S. or qualified foreign corporation. The important word here is "corporation"; dividends from other types of business entities such as Real Estate Investment Trusts (REITs) do not pay qualified dividends. If there is an "Inc." or "Corp." in the name, you probably receive qualified dividends. If "Trust," "Partnership," "L.P." or "LLC" is in the name, that means the dividends are non-qualified.
History of Dividend Taxes
The Jobs and Growth Tax Relief Reconciliation Act of 2003 first made the distinction of qualified dividends. Before the Act, all dividends were taxed as regular income. Tax cuts included in the Act — including lower dividend tax rates — were initially set to expire at the end of 2010. At the time of publication, the lower tax rates for qualified dividends had been extended through the end of 2012.
Qualified Tax Rates
The tax rate on qualified dividends iseither zero or 15 percent. The zero-percent rate on dividends applies if your marginal federal tax bracket is less than 25 percent. For a married couple, this means taxable income less than $70,700 — half that level if you still file as single — and using the brackets in effect at the time of publication. If you fall into the 25-percent or higher tax brackets, your qualified dividends would be taxed at 15 percent.
Reading a 1099-DIV
After the end of the year you will receive one or more Forms 1099-DIV, which you use to include the dividends on your tax return. Box 1a of the 1099-DIV shows the total amount of dividends you were paid, and Box 1b shows what portion of those dividends were qualified dividends. Both amounts must be entered on the proper lines of your tax return. The tax return instructions include a separate dividends worksheet on which you can calculate the taxes due on any qualified dividends you earned.
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.