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Dividend Income

Dividends are distributions of money, stock, or other property, paid to you by a corporation. Dividends are also received from a partnership, estate, trust, or an association taxed as a corporation.

Many kinds of dividends you receive are actually interest income, not dividend income. This includes dividends paid on deposits or share accounts in cooperative banks, credit unions, domestic savings and loan institutions, federal savings and loan associations, and mutual savings banks. Dividends that are actually interest are reported on Schedule B.

For most types of dividends, you should receive a Form 1099-DIV from the payer of the dividends. Even if you do not receive this form, it is still your responsibility to report the income on your tax return.

Ordinary Dividends

Ordinary dividends are paid out of the earnings and profits of a corporation and are paid to you on stock or holdings you have with the paying company. These dividends are generally ordinary income, not capital gain income. You can assume that dividends you receive on common stock and preferred stock are ordinary dividends unless the corporation tells you otherwise.

Ordinary dividends are reported in Box 1 of Form 1099-DIV.

Qualified Dividends

Qualified dividends are ordinary dividends meeting special requirements to qualify for the 0%, 15% or 20% tax rate. All the following must be true:

  • Dividends must have been paid by a U.S. corporation or qualifying foreign corporation.

  • Holding period requirements were met:
    • You must have held the stock for 60 days during the 121-day period that begins 60 days before the ex-dividend date.
    • The ex-dividend date is the first day following the declaration the buyer will not receive the next dividend payment.
  • The dividends are not:
    • Capital gain distributions
    • From a tax-exempt corporation
    • From an employee stock ownership plan maintained by the paying corporation
    • Payments that are in lieu of dividends
    • Actually treated as interest income

Which tax rate the dividends qualify for depends on what the regular tax rate on the dividends would be. This is determined by your tax rate on earned income.

  • Dividends qualify for the 0% rate (tax-free) if you fall within the 10% or 15% tax brackets.
  • Dividends qualify for the 15% rate if you fall within most higher tax bracket, and 20% if you're in the highest tax bracket (39.6%). There are exceptions, so see IRS Publication 550 for more information.