Dividends are considered a form of income and as such, they are subject to federal and state income taxes. Some people feel that this is double taxation because the company paying the dividend has already been subjected to a corporate tax for the money. They argue that since shareholders are part owners of the company, they have already been taxed. Those in favor of a tax on dividends claim that because a corporation is a legal entity in and of itself, it is considered separate from its shareholders.
Whatever side an individual takes, the fact is that dividend payments must currently be declared on an individual income tax return. The ordinary dividend tax rate currently matches the ordinary income tax rate. The qualified dividend tax rate is a maximum of 15 percent, depending on an individual’s tax bracket. This is the same tax rate used for long-term capital gains. A dividend payment must meet certain criteria to receive qualified dividend tax treatment.
If a company pays a shareholder dividends of at least $10, it must send the shareholder a 1099-DIV form. The information from this form is used when preparing the tax return. Individuals who receive dividends through a subchapter S corporation, partnership, trust, or estate will receive a Schedule K-1 from the entity that issued the dividend payment. Even if they do not receive these forms, individuals must report all their taxable dividends when filing their tax returns.
Dividends are declared on Form 1040 Schedule B and the filer lists each payer and associated dividend amount on Line 5 of Part II-Ordinary Dividends. The amounts are then totaled and the sum is recorded on Line 6. If the figure on Line 6 exceeds $1,500, the filer must complete Part III- Foreign Accounts and Trusts. This section includes two questions for which yes or no responses are required. The answers determine whether other information must be supplied.
Individuals who have difficulty completing this form should refer to the included general instructions, which walk them through the purpose and how to complete each line of the form. Once the form is completed, the value shown on Line 6 is inserted on Line 9a of the Form 1040 or on Form 1040A. The Schedule B form must be attached to the completed Form 1040 prior to the tax return being submitted to the IRS.
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