3 Things You Need To Know About Reporting Dividends

Upon buying stock in a company, you will start to receive dividends that are based on the success of that entity. In good years, your dividends may really begin to add up and potentially impact your taxable income. By appropriately assessing and reporting your dividends on your taxes, however, you actually increase your ability to net a higher return. Here are three important things you need to know about reporting dividends to the IRS.

Qualification Specifications

The IRS requires that you identify your dividends as either ordinary or qualified. Since the ordinary dividends are taxed at a higher rate, it is often in your best interest to ensure the majority you receive are considered qualified. The qualified tax rate ranges from 0 to 20 percent, while the ordinary rate runs between 10 and 39.6 percent.

To receive the qualified designation, dividends must come from a corporation that operates or trades within the United States and meets the holding period requirements. The holding period refers to the amount of time you owned the stocks. Many dividends from US based stocks become qualified once you own the associated stocks for more than 60 days.

Estimated Payment Requirements

You may need to calculate your expected dividend allotments and identification designators to determine if you need to pay estimated quarterly taxes on the owed amount. If you collect more than $1,500 in dividends designated as ordinary, for example, you will likely be subject to additional penalties and fees if you only file and pay once a year. To avoid these extra charges, you can estimate your taxes and file with the IRS on a quarterly basis.

Capital Loss Offset Rules

You will need to calculate and apply the tax rate to your capital gains and dividends separately. If you have capital offsets, you cannot directly apply them to the taxes owed on your dividends in an effort to zero out the balance. You will have the opportunity to apply your net capital losses to your total taxable income, which has the ability to indirectly reduce the taxes you owe on your stock earnings. If your income surpasses the current limits, you may be subject to an additional Medicare surtax, which does not offset dividends in any way.

Reporting Your Dividends On Your Taxes

When you are ready to evaluate your dividend collections for the year, and calculate your owed taxes on those amounts, you may contact The Income Tax Center in St. Louis, MO to schedule an appointment. Your tax advisor can help you apply the appropriate rate to each of the dividends collected from your stock portfolio. With your Missouri tax expert’s help, you can even identify stocks in need of adjustment to avoid having to pay estimated quarterly taxes.