Qualified and ordinary dividends are an investor’s best friend. However, a lot of investors worry come tax time because they are unsure how the dividends are taxed when their 1099-DIV comes in. So, what are dividends? Dividends are profits that a corporation (or a company in general) pays back to their shareholders. Dividends are mostly distributed as cash, but can be other items like property, stock options and even services. Typically, these payments are made quarterly, but they can be made yearly and even monthly in some cases. Also, dividends are usually summarized for the year and sent out to the shareholder via a 1099-DIV. If the dividend was received and deposited into a brokerage account, then you will see it on a consolidated 1099-DIV. This document will normally be sent out around mid-March to investors.
Two Types of Dividends
For taxes there are two types of dividends Ordinary and Qualified dividends. Usually on the 1099 DIV these will be separated and calculated by the issuer. Ordinary dividends will be found on box 1a and qualified dividends will be found on box 1b. Ordinary dividends are by far the most common type of dividends and are taxed the same as ordinary income. This means that for example your dividends will be tax at the same rate as your income. However, keep in mind that this income will be combined with for example your W-2 wage, and you’ll be taxed on that.
An example of this would be if you made $50k and you also had ordinary dividends of $50k then your total combined income (if you didn’t have any other income) would be $100k and then you would be taxed on that total minus any deductions that you incur. Ordinary tax rates are as follows and can range from as low as 10% all the way to 37% for high income taxpayers.
| Tax Rate | Taxable Income | Taxable Income |
| (Single) | (Married Filing Jointly) | |
| 10% | Up to $10,275 | Up to $20,550 |
| 12% | $10,276 to $41,775 | $20,551 to $83,550 |
| 22% | $41,776 to $89,075 | $83,551 to $178,150 |
| 24% | $89,076 to $170,050 | $178,151 to $340,100 |
| 32% | $170,051 to $215,950 | $340,101 to $431,900 |
| 35% | $215,951 to $539,900 | $431,901 to $647,850 |
| 37% | Over $539,900 | Over $647,850 |
Qualified Dividends
So, we talked about ordinary dividends, but what about qualified dividends? Qualified dividends, per the IRS are dividends that meet the requirements to be taxed as capital gains. In addition, to be qualified a dividend must meet a holding period requirement. Also, the owner of the dividend must hold on to the qualifying stock for 61 days if it is common stock and 91 days if it is preferred stock.
Also, there is an additional requirement for mutual funds. In order to qualify for the preferential tax rate, you would have to hold the common stock, unhedged for 61 days of the 121 days, that start 60 days before the ex-dividend date. For preferred stock it needs to be held unhedged for 91 days of the 181 days that start 90 days before the ex-dividend date. Also, investors in mutual funds must hold the applicable shares, 60 days of the 121 days that start 60 days before the fund’s ex-dividend date.
Tax Rates for Qualified dividends
Qualified dividends are taxed at 0%, 15% and 20% rates. The rates breakdown as follows:
| Tax Rate | Single | Married, Filing Jointly |
| 0% | $0 – $40,400 | $0 to $80,800 |
| 15% | $40,401 – $445,850 | $80,801 to $501,600 |
| 20% | $445,851 or more | $501,601 or more |
How do I report Dividends?
Normally you should receive a 1099-DIV from either the company that you get the dividend from, or you will receive a consolidated 1099 from your brokerage if you use one. On this form, it will list the amount of ordinary dividends and qualified dividends on boxes 1a and 1b respectively. These amounts will get reported on page one of your 1040.
Conclusion
In conclusion there are two main types of dividends for tax purposes. Ordinary and qualified dividends, in short ordinary dividends are taxes at the same rates as ordinary income. Qualified dividends are, however, tax at very preferential rates. However, you must meet certain holding requirements to make sure that these dividends are qualified. Also, most people will receive the total amount of dividends from a 1099 form called a 1099-DIV.