09 Feb How do I report qualified dividends on my tax return?

Q. I’ve heard that qualified dividends may qualify for a reduction in federal taxes. The form to check is very confusing. Two years in a row I did not use the form correctly and overpaid my taxes. Both years the IRS gave me a refund because of qualified dividends. I find it difficult to believe that the IRS would use the same form to check. Is there a quick way to determine how qualified dividends are treated outside of this form?
— Taxpayer

A. We feel your pain.

Doing your own taxes, at times, can be a challenge.

Let’s start from the beginning.

Dividends are payments of profits that C Corporations pay out to shareholders, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

He said historically, dividends were taxed at the taxpayer’s normal tax rates.

“At that time, a C Corporation such as IBM would make a profit and the corporation would pay federal income taxes on it,” Kiely said. “It would then pay part of that profit as a dividend to shareholders. The shareholders would also pay income tax on the dividend.”

The dividend was taxed twice, he said.

Then in 2003, the Jobs and Growth Tax Relief Reconciliation Act was enacted.

“This act created the concept of qualified dividends,” Kiely said. “A qualified dividend is a dividend paid by a domestic C Corporation that already paid tax on its profits. Qualified dividends were taxed by shareholders at a preferred rate similar to long-term capital gains.”

Federal tax rates in 2023 were 10%, 12%, 22%, 24%, 32%, 35% and 37%.

“Qualified dividends and long-term capital gains are taxed first, then regular taxable income is taxed,” Kiely said.

Qualified dividends and long-term capital gains are taxed at 0% for the 10% and 12% tax brackets, 15% for the 22% tax bracket and 20% for everything in the 24% and above tax brackets.

Kiely said the form you’re talking about — the Qualified Dividends and Capital Gains Tax Worksheet — was created to determine your tax when you have long-term capital gains and/or qualified dividends.

“This form has 25 lines so it looks complicated. But if you follow the instructions, it’s not really,” he said.

Kiely said you can divide this form into three sections.

The first section calculates how much of your long-term capital gains and qualified dividends are taxed at the 0% tax rate.

The second section calculates your 20% tax on long-term capital gains and qualified dividends.

The third section calculates the tax on your ordinary taxable income.

Kiely noted that you said that you did not use the form correctly for two years.

“That tells me you are preparing your taxes without the help of a computer. I suggest you look into a retail tax prep program going forward. A program will help you avoid 99% of the potential mistakes when preparing your taxes,” he said. “I know of no other way of calculating taxes on long-term capital gains and qualified dividends other than using the Qualified Dividends and Capital Gains Tax Worksheet.”

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This story was originally published in February 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.