 Income tax, 2021, 2022, dividend income. Get ready to get the refunds to that max, diving into income tax, 2021, 2022. Here we are in our income tax formula, focusing in on the first line, that income line. It's still looking deceptively simple as just one line, but remember, we can expand on it, thinking of this as the summary sheet, kind of like the 1040 in summary, other schedules feeding into it when we're looking at the top line, other schedules could feed into it like schedule one, schedule C, schedule E, schedule D for example, which we'll talk about in the future, but now we're looking at the dividends. Dividends is usually something that you're going to get a statement from a 1099 div, and it usually is fairly straightforward, but you have some interesting components with it, including whether or not you're gonna have a different tax rate with regards to the dividends, we can have two different basic type of dividends, and there's often arguments as to double taxation with regards to dividends, so these are all things that you're likely to get questions about from time to time by clients, so it's good to have an understanding of what dividends are, what double taxation is, why there's an argument as to why dividends might be taxed at different rates rather than the simple or standard progressive tax system for example. So to get an idea of that note, if you're most investors, you might be a passive investor for example, just with index funds possibly, or mutual funds or something like that, that you're investing in, the other thing that confuses this by the way also is that if you have the investments in the umbrella of like a 401k plan or an IRA, then you might not be paying taxes on it because it's under the umbrella even when you get the distribution of the dividends, and so that's another thing that can confuse people, they might say, hey I've got all this money and stocks and bonds, I'm getting dividends, but I didn't get a 1099 for it, well that's because it's possibly it's under the umbrella of the retirement plan, so these are all questions that could basically come up. So the general idea, corporation earns money, the corporation is unique in terms of a business format as opposed to like a partnership or sole proprietor in that it's its own separate legal entity and it has attributes then for an entity like a human being in essence it pays taxes in other words. So the government is actually getting some of the revenue from the corporation, so they're already getting some of that money there and then this is representing the money that is left and then if the owner, if they want to distribute money to the owner which is like us and note, we often don't think of ourselves possibly as an owner, we think of ourselves often as an investor if we're passive investors because we own a very little amount therefore we don't have a lot of control but the stockholders are the owners, right? If you owned a lot of stock then you'd have control over voting rights and so on and so forth. So in any ways the money is then gonna go to the owner in the form of dividends and the government is gonna get a piece of that as well as it goes to the dividends. That's what we call the double taxation. That's where double taxation comes into play because we're talking about income taxes which got taxed at the corporate level and then it got taxed again at the distribution level. Now if you were talking about like a sole proprietor for example or other pass-through type of entities that doesn't happen because the distribution isn't taxed it's only gonna all the revenue and like a sole proprietorship is taxed on your schedule C flows through to the first page of the 1040 and you just get taxed one time. You don't get taxed by drawing the money out of your sole proprietorship or your partnership for example and they have flow-through entities which are different in that respect as well and they're trying to avoid this kind of double taxation. So because of this double taxation you get all these different kind of laws people arguing that we shouldn't have the taxes on the dividends or there's arguments that the dividend is a passive income and because it's a passive income it should be taxed and then of course there's arguments well people that have own stocks are rich people even though that's not totally true because like many people have access to stocks these days and whatnot so but that you'd say and that means that we should increase the tax on investments to increase it and obviously the counter argument with that would be well that's crazy because you're gonna kill we want the economy to grow and the way to grow the economy is to have capital go into people that need it the businesses that are making stuff and whatnot so there's all these arguments around the dividends and that's why you might see different kind of tax taxation for it so the reporting of it is gonna be fairly straightforward because you should get a 1099 div if it's a normal publicly traded company you won't get that 1099 div if it or you could have some differences if it's under the umbrella of something like an IRA or a retirement plan which you would have to explain and then the tax software will hopefully apply the proper tax for you if there's any kind of differentiation in the tax calculation so here's the little bit of money that we get after the double taxation in our slides so types of dividends then we have ordinary dividends and qualified dividends so these are gonna be the two types of dividends and they're gonna be significant because they could lead to different tax implications here we are in our 1099 div this is what you'll typically get from your financial institution to help you out to be reporting your dividends now note that it might not look exactly like this in format, might not have all the boxes but it will typically have the numbers involved so that you can look them up in the instructions and you've got the form name here so let's just go through it real quick and we've got the payer's name and address the payer's TIN, the recipient's TIN and so on and then the box 1A and 1B these are the biggest boxes the first one 1A total ordinary dividends and then 1B qualified dividends so if you saw a number in both of these boxes we're not adding them together to get the total dividends we're saying the first box 1A is kind of like the total dividends and then 1B is of the dividends in 1A these are the qualified dividends which could have usually more favorable tax treatment and then all the boxes below are far less common to see but you could see some of them so 2A total capital gain distribution so this would mean that you got a distribution that should be reported as a capital gain which might be reported on a schedule D this often confuses people because when you're trying to check what is happening say like in your Excel worksheet for example this will be on another sheet it'll be like on the schedule D oftentimes and so you gotta kind of note that because this comes up fairly often note that if you're looking at dividends usually you're thinking about retained earnings the company has generated revenue and is distributing the earnings that they have gotten back out but if they're dipping in past the retained earnings going into the investments for like when they sold the stock into that component of their revenue then that could be treated differently possibly as like a capital gain and then you've got some special conditions unrecaps section 1250 gain now oftentimes if this comes up you're gonna wanna look at the instructions and oftentimes your tax software will help you with these other kind of things which are a bit more unusual but this instructions can help you to guide you on them as well as the tax software and the instructions so section 1202 similar situation collectibles 28% gain in the case of collectibles and that doesn't happen quite as often even as the section 1250 in my experience section eight depends who your clients are of course however section 897 ordinary dividends section 897 capital gain dividend distribution federal income tax withheld that means that you could have withholdings cause you're saying hey look I got a dividend that's gonna increase my income I might have withholdings on it however you don't normally have oftentimes withholdings here because unless maybe they're in retirement or something like that because most of the time people might then adjust their withholdings with like their W2 withholdings or possibly they'll make quarterly payments if that's what they're doing but you can imagine a situation where you're gonna take the withholdings out here on the dividend section 199A dividends investment expenses, foreign pay tax if that would be applicable foreign country or US possession, cash liquidation distributions so now you're talking about the liquidation of the company non-cash liquidation distributions so liquidation meaning the company's liquidating or closing so that you could have different tax treatments than like a normal dividend type of distribution so and this is the same thing but a non-cash exempt interest dividends and specified private activity bond interest dividends and then you got the state information on down below so if you have any of those questions on any of those boxes you can go to the instructions if you don't get the instructions with the actual form but then you can always look them up on the IRS website because the instructions will be standardized the dividends if you take a look at the first page of the tax return we've got the qualified dip portion here and then the ordinary dividends on the right so if I was to see this on the 1099 dividend this would be in the first box for the dividends, the ordinary dividends and then the second would be this 1000 this would be 1A the second box 1A and 1B right so these are the this is they're gonna be the qualified portion of the dividends so if I was to look in here total ordinary dividends and then the qualified dividends so I wouldn't be saying in this case that I had 4,500 dividends no I'm saying that I had 3,000 dividends and of those 3,000 1,500 of them were qualified this 3,000 then is what's being included as we go into the adjusted gross income now it's gonna get confusing here when you get to the tax calculation because you might ask someone might ask well what's the point of breaking these out well there might be different tax calculations on it well how does that work because we're using a progressive tax system that already has multiple tax brackets in there well that's true but now we're adding more tax components based on the type of income that is included is it gonna be taxed ordinary income or is it gonna be taxed special type of rates ordinary income being the normal progressive tax rates and then if your income goes over a certain threshold we've got schedule B which we saw also had the interest involved has the dividends as well so if your interest in ordinary dividends are above a threshold then you're gonna have to include or add on the schedule B which we'll feed into that page one we'll see more of that when we get to the software example qualified dividends enter your total qualified dividends on line 3A qualified dividends are also included and the ordinary dividend total required to be shown on line 3B so qualified dividends are eligible for a lower tax rate than other ordinary income so that's gonna be the benefit the qualified means that you get a beneficial tax treatment which you can't really see on the tax return because it's gonna be combined in in other words the actual benefit that you get is gonna be combined in with the tax calculation which usually comes from the tables which we typically rely on the software to do generally these dividends are shown in box 1B of forms 1099DIV C publication 550 you can find that on the IRS website for the definition of qualified dividends if you receive dividends not reported on form 1099DIV in general there are three things that will help to determine whether a dividend is qualified or not and these are gonna be useful to be able to discuss this with the client because the client is gonna be able to see that okay these are the qualified dividends that are being reported these are the items that are not qualified given the 1099DIV but they might ask you why a dividend would be qualified or not and for planning purposes in terms of investing it could be something relevant when you're looking out into the future so this is the main one number one it is paid by US corporation or qualifying foreign entity so the incentive there being that of course the United States would like to incentivize the capital investment in the United States corporations possibly then giving a tax benefit when doing so two it is actually a dividend in the eyes of the IRS so in other words we looked at some instances where you get a distribution for example from a corporation which isn't qualified as a dividend maybe it's some other kind of distribution maybe they're not distributing the retained earnings but it's dipping into like capital gains or something like that and then three you held the underlying security for long enough this is the one that gets a little bit confusing so if you had questions on this one you could go into the instructions and dig into it in a little bit more detail but for most passive of investors this one will be you know they'll pass this one generally and you can basically see that what is happening in terms of just pulling the information off of the 1099DIV but if you're talking of active investors that aren't so much of as passive investors they might have to look at these kind of rules a little bit more closely and you can look at the instructions related to them you held the underlying security for long enough the definition of enough gets a little tricky but typically if you own the security for more than 60 days during the 121 day period that began 60 days before the ex-dividend date that is the day by when you must own the stock to receive the dividend the dividend is usually qualified so that gets a little technical on when the dates are located note that when you're talking about dividends it's confusing when the dividend actually goes out because you have to determine who's going to get the dividend for these stocks that are trading all the time and so that's why it gets a little confusing with the dates but there's going to be a favorable tax treatment as we took a look at so the tax filing status you could have a 0% a 15% and a 20% on the qualified dividends and you've got then the ranges for the single married filing jointly, married filing separate and the head of households of the filing statuses so in other words basically the ordinary income rates will have a progressive tax rate that we have seen which will usually be dependent on the software to calculate and then based on where you fall you will typically have if qualifying dividends have some beneficial rate that will be lower than at least your marginal tax rate on the ordinary income and that's going to be the benefit of having this item so that adds another added level of difficulty to actually do the calculations which were typically dependent on the software to do which will be applying the progressive tax systems and then pull out the income that was related to dividend income or qualified dividend and then determine the separate tables which is still kind of a tiered system so you can see it as a whole another kind of progressive tax set of tables then fly out and apply of the proper income related to them, non-dividend distributions some distributions are a return of your cost or other basis, they won't be taxed until you recover your cost or other basis you must reduce your cost or other basis by these distributions after you get back all your cost or other basis you must report these distributions as capital gains on form 8, 9, 4, 9 so in other words, if you get a distribution and it's not coming out of earnings of the corporation then it's basically going to be recovering your cost and you would think that you would be treating it more like a sale kind of thing possibly something that would be a capital gain that would be going on the schedule D instead of like a dividend type of situation so dividends on insurance policies are a partial return of the premiums you paid don't report them as dividends include them in income on schedule one, line 8Z only if they exceed total of all net premiums you paid for the contract