Owe the IRS Dividend Tax? Here’s What You Need to Know

Owe the IRS Dividend Tax? Here’s What You Need to Know

What are Dividend Distributions and Payments?

Dividend payments are distributed to shareholders by public companies in the form of stock or cash. Shareholders of a company that offers stock can receive passive income from dividend payments without selling the stock shares they own.

The amount of dividend payments distributed to shareholders depends on how much the company makes in profit. It also depends on how many shares of stock a stockholder owns. The more stocks a shareholder owns, the higher the dividend will be. Shareholders pay taxes on dividends received, and the amount of dividend taxes varies by dividend type.

Note that companies are not legally obligated to offer dividend payments, regardless of their profits or revenue.

How Often Do Companies Pay Dividends?

Most companies pay dividends either every month, every 3 months (quarterly), or once per year. If a shareholder owns 50 shares in a business, and the business announces it will pay $10 in quarterly dividends, then that shareholder will receive a $500 dividend payment.

The shareholder must have purchased stock in the company at least two days before the company announces dividend payments or the date they plan to distribute dividends. Buying stock less than two days before a dividend distribution means you won’t receive dividends on that newly bought stock. Instead, you will have to wait until the next dividend payment is announced to be a recipient.

When Do I Pay Taxes on Dividends Received?

You pay taxes on dividends received when you file federal and state income tax returns. In most cases, this is mid-April each year. For 2023, the due date for taxes was April 18th. However, the IRS allows taxpayers to request extensions for filing their taxes.

Form 1099-DIV contains the taxable dividend amount you need to enter on your tax return. Companies issuing dividends must file a 1099-DIV for each individual shareholder to which they have paid traditional dividends, exempt-interest dividends, and/or capital gains dividends.

How Do You Report Dividends on Tax Returns?

Most people receive ordinary dividends that are considered taxable income. If you received more than $1,500 of ordinary dividends, you would need to report this amount on your Form 1040 federal tax return. Include your ordinary dividends amount on line 5 of your 1040. You can find this amount in Box 1a of the 1099-DIV you received from the company in which you own shares.

Qualified dividends differ from ordinary dividends because they are paid by a U.S. corporation or a foreign corporation that offers tradable stock, operates in a country that has an income tax agreement with the United States; and is considered incorporated with the U.S.

How Does the IRS Tax Qualified Dividends and Ordinary Dividends?

Ordinary dividends have the same tax rates attributed to your annual earned income. Qualified dividends are taxed at long-term capital gains tax rates, which are lower than regular income taxes.

What is the Current Dividend Tax Rate?

The tax rates on ordinary dividends are the same as for your income tax bracket. In other words, taxpayers in higher tax brackets will pay higher dividend tax rates. For example, if you are a single filer with a taxable income of $90,000, the tax rate for your dividend amount is 24% — the same tax rate applied to your annual taxable income.

Are Any Dividend Payments Tax-Free?

A few options exist that may permit dividend payments to be non-taxable. Opening a Roth retirement account is one such option. Since this type of account is paid with after-tax funds, the owner of a Roth retirement account can withdraw tax-free money from their account once they turn 59 1/2. Therefore, dividends paid into a Roth account would be tax-free, as long as the account holder is at least 59 1/2 years old and opened the account over five years prior to withdrawing funds.

Also, single filers with incomes below $41,675 do not have to pay taxes on dividends. Married couples filing jointly can earn up to $83,350 before they have to pay taxes on dividends.

Will the IRS Help Me If I Can’t Pay Dividend Taxes?

Yes, the IRS offers payment plans and installment agreements, an Offer in Compromise, and other relief options to help you pay a dividend tax debt that you cannot pay in full. Note that if you qualify for an IRS Offer in Compromise payment plan, you may be able to settle dividend taxes for less than you owe.

Need more help? You can start online by answering 6 simple questions. We never charge for ‘investigations’ or consultations. You can also call us at 866-568-4593.

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