| Since the IRS taxes different dividends at different | | | | category. |
| rates, it is important to understand how dividends are | | | | Qualified dividends that would normally fall under the |
| classified. | | | | 25% income tax rate are taxed at 15% and qualified |
| First, we need to know exactly how a dividend is | | | | dividends that would be taxed under 25% are taxed at |
| defined. A dividend is the way a corporation shares its | | | | zero. |
| profits with its stockholders. Dividends are generally | | | | You report your qualified dividends on line 9b of form |
| paid in the form of cash, stock, or property based on | | | | 1040, but your savings are not calculated until you list |
| annual company performance, but quarterly payments | | | | your income on line 44. A tax booklet is available to |
| are not uncommon. | | | | help you calculate dividend income; it includes a |
| Dividends must be claimed on your federal income tax | | | | worksheet for helping determine the numbers. The |
| return as income. The distributing party must report all | | | | result is that your Adjusted Gross Income is |
| dividends in excess of $10 on an IRS Form 1099-DIV. | | | | determined after subtracting your dividends. Next, you |
| The 1099-DIV separates the payment types, with | | | | determine the tax on your these dividends and add it |
| ordinary dividends reported in box 1a and qualified | | | | to your total. There are many determining factors in |
| dividends in 1b. | | | | calculating your tax on such dividends, so it is important |
| Some dividends are categorized as "qualified" and are | | | | to use the worksheet provided. |
| taxed at a lower rate than "ordinary" dividends. There | | | | You have to report your income from "ordinary' |
| are three set restrictions for a dividend to be | | | | dividends on line 9a of form 1044. This number |
| considered "qualified." These dividends must be paid by | | | | becomes part of your total income and will be taxed |
| a U.S. Corporation or a qualified foreign corporation. | | | | as such. If your income from "ordinary" dividends |
| These dividends must meet a required holding period. | | | | exceeds $1500, you will have to itemize them on |
| Qualified dividends cannot fall into the IRS "unqualified" | | | | Schedule B, part II and complete Part III, as well. |