 Income tax 2023-2024. Dividend income. Get ready and some coffee because contrary to popular belief, you need a strong imagination to do income tax preparation 2022-2023. First, a word from our sponsor. Yeah, actually, we're sponsoring ourselves on this one because apparently the merchandisers, they don't want to be seen with us, but that's okay whatever because our merchandise is better than their stupid stuff anyways. Like our trust me, I'm an accountant product line. Yeah, it's paramount that you let people know that you're an accountant because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. Most of this information comes from the line instructions section of the form 1040 instructions tax year 2023 which you can find on the IRS website at irs.gov, irs.gov. Looking at the income tax formula, we're on line one income. Remember in the first half of the income tax formula is kind of a funny income statement. An income statement typically having income minus expenses resulting in net income. The tax income statement having income minus various deductions resulting in taxable income. We want taxable income as low as possible typically because that will usually result in less tax. Therefore when looking at line one income, we would like to have that basically as low as possible having as much income exempt or not required legally to include in taxes as possible. That's the general idea. Now also note that some sources of income might be taxed at different rates oftentimes lower rates possibly than ordinary income. Ordinary income therefore is the default progressive tax rates that we've talked about in the past and some things might be taxed at some lesser like progressive tax rate for example qualified dividends. So that means that we are having an impact on the income statement of the tax return because income might be impacted to get to taxable income but we also have an added complication with the calculation of the tax because we're not just going to apply the progressive tax rates we have to break out the sources of income that are subject to some other tax system. So we want to keep that in mind that's important with regards to dividends because qualified dividends might have different tax rates. Now dividends are usually fairly straightforward with the reporting. You're usually going to get a 1099 dividend and you can see exactly where to put them. There's going to be a line for qualified dividends versus non qualified dividends but oftentimes we have questions about what dividends are so we can have some assurance about our tax input and so that possibly when we get to more advanced situations we can give advice about dividends and whatnot and there's some overlap with regards to taxation of dividends and investment strategies. So just note that most normal investors are going to be investing in stocks and bonds and they might be investing mainly in mutual funds. When we think of mutual funds or ETFs we also have many people that are going to have the substantial portion of their investments under the umbrella of an IRA, a 401k, some kind of retirement plan. Note that if it's under an IRA 401k retirement plan the interest and dividends from those investments may not be reported on a form 1099 dividend because it may not be taxable in the current year. That's the purpose of putting them under the umbrella of a retirement plan. You might get a deferral of the taxation and then when you take the money out you might be subject to tax at the point in time that you take the money out. So that's the first thing to kind of wrap our minds around. Also we're investing usually in mutual funds which means that we might not be investing in individual stocks but rather kind of pooling the money together in a mutual fund type of investment and because we have a financial institution and are usually investing in publicly traded stocks the government is usually requiring the brokerage firms, the financial institutions to provide us with those 1099 forms. Now what are dividends then? We can kind of compare dividends to what you would have for a sole proprietorship. So let's say you own your own business, you have a sole proprietorship and you have just a Schedule C business. Well the business earns money and you would have to pay taxes on that money instead of filing a separate return. You would be filing a Schedule C resulting in an income statement income minus expenses net income in essence subject to the tax and then if you pulled money out of the business because we would still be doing bookkeeping keeping the business checking account for example separate from the personal when you pull money out of the business we don't call that an expense we call that a draw so the business owns money or makes money you pay taxes on it as it makes money when you pull money out of the business to spend it on personal stuff we call that a draw you don't pay taxes on a draw typically because you already pay taxes when the business earned revenue which you reported on the Schedule C the draw is just the transfer from the business to you with a with a corporation we have a similar situation except for the corporate entity is taxed in and of itself so the corporate entity is now subject to tax in a similar fashion as an individual is going to be subject to tax instead of having one owner we have a bunch of owners that are now have a percentage of the corporation that is determined by equal shares that are going to be given out so that's what the shares are basically doing why would we invest in a corporation we want the earnings from dividends to be distributed number one or we want the stock value to go up in value so that when we sell the stock will have basically a gain a capital gain at the point of sale now as the company earns uh uh money then then what what's going to happen is the company is going to be paying taxes basically as they earn money as we the owner want the money from the business we can't just as an individual stockholder say hey give me some draws out of that business I want some money because in order to keep all the stocks the same they have to give dividends of equal amounts to everyone that's one of the pros and cons of of making everything uniform the same so that means that everyone that has a stock has to have the same amount of dividends and it becomes an administrative kind of thing that they have to do meaning they have to determine how much dividends they're going to be giving and then distribute them evenly over uh the shares of uh stock so now when you get the dividend the thing is that you're going to be counting it as income and that kind of results in a double taxation situation which is one of the rationales for basically having possibly lower tax rate on the corporate dividends so let me show you so if we have a corporation they earn money what happens the tax man the tax collector the government is going to make the corporation file as a separate entity and pay income taxes as they earn the money in a similar way as if we scheduled a schedule C we would have to report it on the on our 1040 have a schedule C and report the earnings and then uh then we're going to have the the corporation pay us in terms of dividends so now the corporation earned money they already got hit with the taxes as they earned it as we would if we earned money on our sole proprietor and then they're going to give the money to us in something similar to a draw kind of like us drawing money out of a sole proprietor but now it's called a dividend and then again we get hit with a tax when we pull the money out or when we get the money in the form of a dividend that's why you have this kind of double taxation situation which because it gets taxed at the corporate level when they earn it and taxed at the distribution level when it gets distributed in the form of a dividend so one of that's one of the justifications to have like a a different tax rate all right so types of dividends generally you have ordinary dividends and you've got the qualified dividends these will usually be fairly well clearly defined on the form 1099 div so the data input is pretty easy to do it's usually just the explanation why they have it there right so the government is going to have incentives to want to want people to invest in local and in us businesses right so that's typically the idea for the advanced status of qualified dividends to try to get people to want to invest more in United States companies right so then so they get a better tax rate than the ordinary dividends we'll talk about the tax rates later but that's the general idea so if you have dividends that are subject to qualified dividends then they're still going to be included in income still subject to tax but possibly subject to a lesser a more favorable rate tax rate than the ordinary dividends in order to see that distinction you'll have to actually look at the calculation of the tax on the tax return which is usually something we let the software calculate so that's something that you can have to drill down on when you when you kind of look at the this component for the dividends so here's a 1099 div you might get a 1099 div from a financial institution of course and therefore it might look a little bit different but the boxes will be labeled the same so if you have any questions about the boxes you can go to the 1099 div on the iris website look at the instructions and get further information so you've got the total ordinary dividends and then the qualified dividends these are the most common two boxes and uh notice if you have total ordinary dividends the and qualified dividends the qualified dividends are not doubling in other words if you had 2000 up top and then down below you had uh another 2000 that would mean that all 2000 of the dividends were qualified dividends it would not mean that you had 4000 dividends meaning 2000 ordinary and and another 2000 that were qualified so the qualified dividends are telling you how much of the of the box one are subject to the the uh qualified portion all right so total capital gain distributions so notice if a company gives out uh money to its shareholders if it's part of earnings then it's going to be dividends because it came out of revenue but if it dips into like the capital investment like when people purchase the stock from the company then they might have a capital gain distribution now this looks complicated but usually with your data input forms it'll be easy to do the data input because the software will help you but you'll have to determine where it will show up on the tax return which will typically be on the schedule d possibly as a capital gain rather than dividends so unrecapped section uh 1250 again looks somewhat complicated but it's usually fairly easy i won't get into detail on all of these but to input these in the tax return and then you can research these line items if you have further questions about some of these more abstract items or unusual items so section 1202 gain collections 28 percent gain section 897 gain and so on non-dividend distribution federal income taxes it's possible to have federal income taxes on the dividends similar to like a w2 but not common because most people in retirement will have their withholdings on the 1099 Rs the money that's coming out of their retirement accounts like like a 401k plans in iris and whatnot section 199 a investment expenses foreign tax paid this one could come up from time to time if there were if you had investments in other countries and they had to pay foreign taxes foreign country or us possession cash liquidation non-cash liquidation exempt interest dividends specified private activity bond interest dividends and then you've got the state information down below because you could possibly have withholdings from the state if the state has income taxes now again any of these boxes that are more unusual and you're and you have questions about you can look at the instructions which are on the back of the form or attached to the form or you can find on the iris website at iris dot gov iris dot gov looking at the tax return we can see in page one in the income area we've got the qualified dividends 3a ordinary dividends on 3b and then you might have to file a scheduled b if your dividend income is over certain thresholds such as 1500 in which case you would just list out the who you got the dividends from in a similar fashion as we saw with the interest okay so line 3a qualified dividends enter your total qualified dividends on line 3a qualified dividends are also included in the ordinary dividend total required to be shown online 3b so again the idea would be that you've got the total dividends and then you've got the qualified dividends that would be part of the total dividends right they're not on top of the total so once again enter your total qualified dividends on line 3a qualified dividends are also included in ordinary dividends total required to be shown on line 3b so qualified dividends are eligible for a lower tax rate than other ordinary income so that becomes complicated why because different people have different tax rates if you have more income your highest tax rate is going to be higher because we have a progressive tax system so if you want to give a favorable tax treatment to something like qualified dividends to try to incentivize people to invest in certain stocks then you're going to have to make it so you have a progressive tax system which always which is always beneficial no matter what tax brackets you're in right okay so generally these dividends are shown in box 1b of form 1099 div see publication 550 for the definition of qualified dividends if you receive dividends not reported on form 1099 div so exception some dividends may be reported as qualified dividends in box 1b of form 1099 div but aren't qualified dividends now again this is somewhat of an unusual situation so so but we have these include dividends you received as a nominee so we talked a little bit about that whole nominee kind of system in uh and when we talked about the interest so you can see the schedule b instructions for more information on that and this is a similar situation noting that the 1099 dividend is going to you and it's also going to the irs so if we're saying hey some of that dividend income shouldn't be applicable to me even though i got the 1099 i have to report it in some way on my tax return otherwise the irs will have a different number than i have and the machine they won't even have to really audit me right they because they already have the information the computer will match up the two numbers and most likely i'm i'm going to have a problem therefore we're going to have to report it on the schedule b and then show the subtraction of it for any for whatever reason came up that it should be on someone else's tax return or someone else should be responsible for paying taxes on it dividends you received as any share of stock that you held for less than 61 days during the 121 day period that began 60 days before the x dividend date so there's certain requirements in terms of how long you have to hold the stock in order to get the favorable treatment which may not may fall under under the radar in that the reporters of the 1099 div don't handle that component because usually the financial institution would have to kind of figure that stuff out but possibly that's not something that they are at this point required to do right they're just required to say well it's a qualified company and therefore we're going to say it's a qualified dividend all right so the x dividend date is the first date following the declaration of a dividend on which the purchaser of the stock isn't entitled to receive the next dividend payment when counting the number of days you held the stock include the day you disposed of the stock but not the day you acquired it see the examples that follow also when counting the number of days you held the stock you can't count certain days during which your risk of loss was diminished you can see publication 550 for more details on that dividends attributable to periods totaling more than 366 days that you received on any share of preferred stock held for less than 91 days during the 181 day period that began 90 days before the x dividend date again this is usually not applicable to most investors because a lot of times they're investing say again in mutual funds which are kind of pooling money together for to make the purchases of the individual stocks and bonds when counting the number of days you held the stock you can't count certain days during which your risk of loss was diminished again you could see publication 550 dividends on any share of stock to the extent that you are under an obligation including a short sale to make related payments with respect to positions is substantially similar or related property so payments so again that would be something that typically would happen on more kind of day traders people that are trading all the time with individual stocks generally and not normal investors that are investing most likely like mutual funds payments in lieu of dividends but only if you know or have reason to know that the payments aren't qualified dividends dividends from a corporation that first became a surrogate foreign corporation after december 22nd 2017 other than a foreign corporation that is treated as a domestic corporation under section seven eight seven four b so in other words if there are foreign corporation then you would think they might not qualify for the favorable dividend treatment and then there's a question of when possibly that took place all right example one you bought 5 000 shares of xyz corp common stock on july 8th so now you're the shareholder you bought the stock xyz corp paid a cash dividend of 10 cents per share the x dividend date was july 16th your form 1099 div from xyz corp shows 500 in box 1a ordinary dividends and in box 1b qualified dividends however you sold the 5 000 shares on august 11th you held your shares of xyz corp for only 34 days of the 121 day period from july 9th through august 11th the 121 day period began on may 17th 60 days before the x dividend date and the end on september 14th you have no qualified dividends we have revoked your qualified dividend status in that case okay example two so the facts are the same as in example one except that you bought the stock on july 15th the day before the x dividend date and you sold the stock on september 16th you held the stock for 63 days from july 16th to september 16th the 500 dollars of qualified dividends showing in box 1b of form 1099 div are all qualified dividends who because you held the stock for 61 days of the 121 day period okay example three you bought 10 000 shares of abc mutual fund so now we have a mutual fund which is possibly more common again for smaller investors i'll stop saying again i got a tick i'm saying again all the time anyway you bought 10 000 shares of abc mutual fund common stock on july 8 abc mutual fund paid a cash dividend of 10 cents a share the x dividend date was july 16th the abc mutual fund advises you that the part of the dividend eligible to be treated as qualified dividend equals two cents a share your form 1099 div from abc mutual fund shows total ordinary dividends of 1000 and qualified dividends of 200 however you sold the 10 000 shares on august 11th you have no qualified dividends from abc mutual fund because you held the abc mutual fund stock less than 61 days not typically something that most people do so any case line 3b ordinary dividends each pair should send you a form 1099 div enter your total ordinary dividends on line 3b so we have our qualified dividends and then the ordinary dividends so this amount should be shown on box 1a forms 1099 div you must fill in and attach schedule b so that's going to be the same schedule as we saw with the interest if the total is over 1500 or you received as a nominee ordinary dividends that actually belong to someone else because if they belong to someone else then you would have to report them and then show that negative amount coming going in and out which is done on the schedule b so you would need it in that case even if under the threshold non-dividend distributions some distributions are a return of your cost other bases so in other words remember what the dividends are are basically the amount what we're imagining is we own the corporation even though we're just a little shareholder and we possibly have our money in a mutual fund right we own the corporation and the corporation generates revenue which they call retained earnings and then they distribute those earnings to the owner of the corporation as opposed to reinvesting back in the company so that they so that the trade-off would be you reinvest in the company grow the value of the stock so I can sell it at a capital gain or you distribute the money in the form of a dividend so they give us the money in the form of a dividend that's when it's typically taxed but you can imagine that they give you the money but it's actually not money that has been earned they tapped into the to the to the investments now what are investments in a corporation well that means when the corporation originally issued their stock and people bought them from the corporation rather than the secondary market that's like the investment into the company so if they're giving you money that's that's not coming from retained earnings but it's coming in essence from the the investment uh then then it shouldn't be classified as dividends and they're going to classify it possibly as as uh as something other than dividends possibly something subject to capital gains for example so you must reduce your cost or other basis by these distributions so after you get back on all of the other cost other basis you must report these distributions as capital gains on form 8 9 4 9 for details you can see publication 5 50 so dividend tax rate 2023 so these are the rates that apply to qualify dividends based on taxable income for 2023 tax year so the general idea would be look if these are qualified dividends you're going to typically have a more favorable tax rate uh than your ordinary income tax rate the ordinary income is taxed at a progressive tax rate so therefore we have to have a whole another progressive set of tables to tax at favorable rates so if you're here's the filing statuses if you're single and uh and uh zero tax rate uh there's a zero tax rate if your income is from zero to 44 625 this is taxable income so zero to 44 625 then qualify dividends we have the zero 15 percent tax rate from 44 626 to uh 492 300 and then 20 percent if you go up above that 492 so the general idea when you're talking to people would be well you have favorable tax rates for qualified dividends what are the actual tax rates well we have it maxed out at 20 percent and then it could go down to 15 based on your tax bracket and down to zero based on uh your tax bracket right so zero 15 and 20 are the rates and it should work out that it's going to be a better rate than your marginal or highest tax rate for ordinary income so here's the married filing joint zero from zero to 49 to 50 15 from 89 to 51 to 553 and then married filing separately matches the single head of household typically like we would expect in the middle of the two so so this is the dividend tax rate for 2024 this so you can see these two adjusted typically for inflation