Ordinary Dividends

Dividends are payments made by a corporation to its shareholder members. Many taxpayers receive these benefits by holding an ownership interest in various investment vehicles, such as stocks, mutual funds, or real estate investment trusts. Generally, all dividends are taxable as earned income. The rate at which they are taxed, however, depends on their classification as either ordinary dividends or qualified dividends. For information on 2013 dividend tax rates, please see Dividends – Current Rates.

A dividend is “ordinary” if it fails to meet either of the two “qualified” requirements (see Qualified Dividends). To make matters a bit easier, all dividends are listed in Box 1a of the taxpayer’s Form 1099-DIV, which each paying corporation sends its investors/shareholders at year’s end (Box1b lists the amount of these dividends which are qualified). When completing Form 1040, taxpayers should total all Box1a amounts from each 1099-DIV from the year and enter that sum on Line 9a. Taxpayers listing greater than $1,500 on Line 9a must also attach a Schedule B.

Imagine Joey receives two total dividends in 2012 – one for $2,050 from stock ownership in Apple (which he’s held for three years) and one for $1,650 from stock ownership in Google (which he owned for two years but sold 10 days before the ex-dividend date). The $2,050 Apple dividend will qualify for reduced tax rates because (1) Apple is a domestic corporation and (2) Joey held the stock for all 121 days during the ex-dividend period. On the other hand, the $1,650 Google dividend will not qualify because, despite Google being a domestic corporation, Joey only held the stock for 50 days during the ex-dividend period. When completing his Form 1040, Joey should enter $3,700 on Line 9a and $2,050 on Line 9b. Additionally, Joey must attach a Schedule B because his Line 9a value exceeds $1,500.

Photo By: Scott Waldron