Did you know that dividend payments from stocks are taxable as income? Well, if you didn’t, let’s get you up to date.
Also, just because you’ve never received a 1099-DIV, it does not mean that you were not accountable for the dividend payments made in past years.
In this article, we will cover everything you need to know so that you can rest assured that you are filing your taxes appropriately. So, keep reading to learn more.
Dividend Types
When it comes to the money you might receive as dividend payments, they are subject to categorization in three types. Each of the types has its own tax implications. They are qualified dividends, ordinary dividends, and capital gain distributions.
Let’s take a look at each in-depth.
Qualified Dividends
A dividend can become qualified if it has been subject to payment by a qualified foreign corporation or US corporation, as well as you meeting the holding requirement for the pertinent stock.
Qualified dividends are subject to tax rates of long-term capital gains and must be reported in your 1099-DIV, box 1B.
Ordinary Dividends
Any dividend paid out form the profits and earnings of a company is an ordinary dividend. These are taxed at regular tax rates. For instance, most real estate investment trusts pay our dividends, which can heighten your tax burden.
These are reported in your 1099-DIV, box 1A.
Capital Gains Distributions
You might also receive a capital gains distribution payment from a stock that is dividend-paying. These often come as mutual funds and must be reported in the 1099-DIV, box 2A.
They are subject to long-term capital gain rates, regardless of the time of ownership.
Keep in mind you have to report all dividends, but the company does not have to send you the 1099-DIV unless you have received more than $10.
This means that you should keep track of how much you earned, in case you have not or will not receive the form. If you need to file your form, but don’t have it, check out this 1099 efiling service.
1099-DIV: The Tax Form
This is the form that you can receive from each of the companies that pays out dividends, or with whom you have a DRIP plan, but only if you received more than $10 and/or withhold taxes from the dividends. However, if the company received a liquidating distribution, you must fill this form out as well.
The document itself splits the types of dividends and their subsequent criteria as follows:
- Box 1A: Total Ordinary Dividend
All of the ordinary dividends are subject to reporting here. These have the same tax rate that your regular income is taxed at.
- Box 1B: Qualified Dividends
The qualified dividends are taxed at long-term capital gains rates. Not your regular income tax rates.
- Box 2A: Total Capital Gains Distributions
These must also have the same tax rate as long-term capital gains rates. Remember to define your dividends correctly.
- Box 2B: Un-recaptured Section 1250 Gain
This type of gain might come from REIT transactions or a specific piece of real estate.
- Box 2C: Section 1202 Gain
This box requires you to report any income that is from a small business stock, i.e., 1202 gain.
- Box 2D: Collectibles Gain at 28%
If collectibles or artwork you had as investments were sold, the profit can be taxed at a maximum of 28%. If held for less than a year, it’s taxed regularly.
- Box 3: Non-dividend Distributions
If you received money that was non-dividend income from a stock company, you have to report it here.
- Box 4: Federal Income Tax Withheld
If a company has withheld taxes from money reported on the form, or if you are subject to backup withholding, you have to report it here.
- Box 5: Investment Expenses
If a non-public RIC has sent you a share of amounts deductible, you must report it here.
- Box 6: Foreign Taxes Paid
If any foreign tax was subject to payment on stock distributions and dividends, you have to report it here.
- Box 7: Foreign Country
The amount of tax paid in box six is subject to reporting. Whereas the country to which received payment gets written in this box.
- Box 8: Cash Liquidation Distribution
If a company has liquidated, this is the quantity of liquidated money they paid to you.
- Box 9: Non-Cash Liquidation Distribution
If you have non-cash distributions, you report their fair market value here.
- Box 10: Exempt-Interest Dividends
You often don’t have to pay tax on exempt-interest dividends, but there are some odd cases.
- Box 11: Specified Private Activity Bond Interest Dividends
Here you report exempt-interest dividends that have been paid by a RIC, specifically from a private activity bond.
- Box 12: State
If you had withheld state income tax from earnings on dividends, you must report it here with the state.
- Box 13: State Identification Number
In this box, the state ID number of the firm that withheld the tax is subject to reporting here.
- Box 14: State Tax Withheld
And finally, the quantity of state income tax that was withheld is subject to listing here.
As you can see, it can get quite overwhelming, but now that you know what each is, you will get your 1099-DIVs in order in no time.
If you remember the beginning of this part from the article, we mentioned a DRIP. Let’s take a look at what that is.
What Is the Dividend Reinvestment Plan?
A dividend reinvestment plan (DRIP) is a specific methodic approach that allows you to use all of your dividends to purchase more of the stock, instead of receiving the payments in cash.
In a simple illustration, instead of receiving $4 in dividends, the company would automatically purchase as many shares (portions of a share) that $4 can buy you.
This will net you with more stock each time. Ultimately, it leads to you owing more shares than you started with.
However, even when the dividends have been recycled, you will still receive a 1099-DIV form with them reported. The IRS sees this as you receiving a check for $4, then immediately using it to buy $4 worth of stock.
The DRIPS has more advantages and convenience over regular stock purchasing, such as dollar-cost averaging.
Each quarter, the payments are subject to recycling to acquire more of the stock. You buy shares at varying prices, which determines the cost basis of the shares.
When you eventually choose to sell the stock for capital loss or gain, you need to know the basis for each share sold. So keep the quarterly statements, which reflect how many shares at what price and on what purchased. From this, you can also determine the actual profit. Some brokers and programs keep track of this.
But what does this mean? Well, it means that even with a DRIP, you are accountable for paying tax on the result of the capital loss/gain.
Be Smart With Dividends
Remember that the IRS gets a copy of your 1099-DIV form, and it will make sure to check that the numbers match up. To avoid any problems, it’s essential to put the right numbers in the right place. As we all know, mistakes lead to audits.
If you’re interested in similar articles, feel free to go through our other financial-related resources on the website.
