Dividends are a form of income commonly dispersed by companies to shareholders. When dividends are considered taxable income, they are subject to tax rates mandated by law. The tax rate on dividends differs and changes, depending on the type of dividend, where the dividends are received and current tax legislation. Since tax regulations change often, the criteria and rate for dividend taxes are specific to each tax year.
Two frequently issued types of dividends are ordinary and qualified dividends. Ordinary dividends are dividends taxed at a variable rate proportional to income. Qualified dividends are taxable at a lower rate because they meet certain criteria. These requirements include holding dividend-earning common stock of U.S. corporations within a 121-day period beginning 60 days prior to the day after the dividend is announced.
The tax rate on dividends also depends on the overall taxable income of the recipient. Since ordinary dividends are taxed at the regular income tax rate, they can be as high as the top income tax bracket. Dividends received in tax-deferred retirement accounts are only taxable when those dividends are withdrawn.
State tax rates on dividends vary, and some states do not tax dividends. Tax revenue from dividends is highest in California, New York and Florida, according to a study by the Tax Foundation. Of the 50 U.S. states, the Retirement Living Information Center says 43 states tax dividends as income.
The specific form used to report dividends to the IRS is Form 1099-DIV. This form shows the amount and type of dividend, in addition to the account to which the distributions were made. If dividends are received from an estate, partnership or trust, IRS Schedule K-1 is used. Even if dividends are non-taxable, they must still be reported to the IRS.
Filing dividend taxes is slightly different from reporting them. Filing is the formal process by which the tax authority is notified of all taxable income and taxes due. Dividend earnings are filed with other income-reporting documents, using IRS Form 1040 and the Qualified Dividends and Capital Gain Worksheet.
When using itemized tax deductions in a tax filing, some expenses can lower the tax paid on dividends. For example, the IRS claims that investment expenses and investment interest can be deducted from taxable dividend income. Mutual funds that invest in tax-exempt municipal bonds, veterans' insurance dividends and dividends received by offshore corporations also bypass dividend tax.
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