What is a Qualified Dividend Worksheet?


You might be happy to have invested in every stock you can lay your hands on and hope to keep smiling your way to the bank as you collect your dividends. The IRS, however, is keenly waiting for you fail to report your income so it can slap you with heavy penalties. Ignorance is no defense in law so even if you claim your investment manager is to blame for the tax evasion, the IRS will not care; it did not show any mercy to Nicolas Cage who had to pay $6 million for the unpaid tax bill, plus fines and penalties. So, before you land yourself in trouble with IRS for failing to report your dividend income, let’s tell you what you need to do to, and one thing you must fill is the qualified dividend worksheet.

All about the qualified dividend worksheet

If you have never come across a qualified dividend worksheet, IRS shows how one looks like; its complete name is “Qualified Dividend and Capital Gain Tax Worksheet-Line 11a.” In short, it is referred to as Form 1040-Line 11a, and even before you try filing out the many blank spaces, you are supposed to have filled out Form 1040 through line 10. The qualified dividends worksheet, however, has 27 lines allowing you to compute your tax and you might not comprehend what each figure is trying to get at, but Marotta on Money simplifies it for us.

The resulting tax amount you are supposed to have calculated in Form 1040 through line 10 has included the qualified dividends and long-term capital gains. Since they are taxed at a different rate, you must separate them from the total income hence the figure you get in line 6 is the total qualified income meaning the sum of qualified dividend income and capital gain. From lines 8-11, you will calculate the total non-taxable qualified income so that you can know which income is taxed at 0%. Taxable qualified income is then calculated from lines 12-14 and from lines 15-19 the amount of qualified income to be taxed at 15% is determined by the resulting figure in line 19.

As you continue with the mathematics, you will get to line 23- the income taxed at 20% -and since you are interested in knowing the tax amount itself, line 20 will indicate the amount of tax at 15%. The total amount of qualified income tax; therefore is the sum of lines 20 and 23 while line 24 shows the income tax owed thus in line 25, the amount showed is the total tax. Line 26 asks you to recheck line 1, and if the amount is less than $100,000, you should use the Tax Table to know what you owe, but if it is more than $100,000, then you will have to utilize a Tax Computation worksheet. Finally, in line 27, compare the amounts on line 25 and line 26 and enter the smaller amount, which is the tax on all taxable income.

How do you know if your dividend is qualified?

Turbo Tax describes one method for your dividends to be qualified is that you must have held the stock in the company for more than 60 days starting from the 60 days before the ex-dividend date. Alternatively, the shares you own must trade on the US stock exchange, a US corporation must pay them, and if they are from a foreign company, then that firm must have a treaty with the US.

The amount of income used as a limit when setting the tax rate has continued to change over the years. As of 2020, you can only file in the 0% tax bracket if you are single and your income is less than $40,000. Also, if you are married and have an income of less than $80,000 and choose to file a joint tax return with your spouse, you qualify for the 0% tax rate. Finally, it also applies if you are the head of the household and earn less than $53,600. However, once income increases, so does the tax rate, and you will be taxed at 15% if you are single and earn $441,449. Head of households who earn $469,049 and married filers who opt for joint returns and earn $496,599 will also be taxed at 15%. Any income amount over the brackets is charged at 20% for each of the categories.

Why the worksheet was provided

IRS introduced the qualified dividend and capital gain tax worksheet as an alternative to Schedule D and added the qualified dividends and new rates to the capital gains worksheet in 2003. The Forms 1040 and 1040A, therefore, help investors to take advantage of lower capital gains rates without having to fill out the Schedule D. The IRS further enlightened taxpayers that the worksheets were for use by those with dividend income only. Those investors whose capital gains included capital gain distributions indicated in Form 1099-DIV, specifically in box 2a and 2b could also use the worksheet. Further clarification was made to taxpayers saying that if they had used the other boxes in the Form 1099-DIV then they still had to make use of Schedule D.

Schedule D (Form 1040) is for reporting capital gains distributions, gains from involuntary conversions, exchange or sale of capital assets not indicated in any other form or schedule and nonbusiness bad debts. On the other hand, Form 1099-DIV is provided to you by your financial institution if you have received $10 or more in dividends. It indicates all capital gain distributions, dividends, non-dividend distributions and any tax withheld from previous payments during that year. Therefore, if you have invested in different companies, each of them will send you a Form 1099-DIV, but even if you do not receive one, you are supposed to report dividends in your tax return lest you are charged with tax evasion.

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