Investing can be an exciting adventure. Offsetting the heady sensation, however, are factual matters that must be faced head-on. Evaluating potential tax implications of investment activity is a case in point. The Internal Revenue Code taxes qualified dividends as capital gains. However, ordinary dividends, the most common type, are taxed as ordinary income, which caries a higher tax rate for most people. If you are paid a dividend of even as little as $10, you will receive a Form 1099-DIV. Even if you never get the form, however, dividend income must still be reported at tax filing time, so it's important to know how to calculate the tax.
1. Find out what your ordinary income tax rate is. If you are not sure or suspect your tax bracket has changed, calculate your adjusted gross income for the tax year, which is gross income less specific deductions. An easy way to arrive at the figure is to fill out a paper or online return until you arrive at the adjusted gross income figure. This generally means filling out the first page of a paper return.
2. Determine your filing status. Among tax status choices are single, married filing jointly and married filing separately. In this example, the status will be single.
3. Find your tax rate on the IRS tax rate schedule for the relevant tax year. The schedule is available on paper or online. The schedule lists income ranges and tax rates according to filing status.
4. Add up your ordinary dividend income for the tax year. If you had several dividend sources, you may have to add a string of figures. Check your calculation to be sure it is accurate.
5. Multiply your total dividend income by the ordinary income tax rate. For example, a single filer with adjusted gross income of $80,000 falls into the 25 percent tax bracket as of 2011. Assuming this filer has $5,000 in ordinary dividends, multiply the dividend income of $5,000 by 0.25 to arrive at dividend tax liability of $1,250.
- Be sure you understand the difference between ordinary and qualified dividends. Consult a tax professional or financial adviser to allay confusion.