Federal employees and retirees who received during 2022 in their brokerage (non-retirement) accounts ordinary dividends (reported to them in Box 1a of Form 1099-DIV) must report the ordinary dividends on IRS Form 1040, line 3b. Copies of IRS Form 1099-DIV and Form 1040 (lines 1 through 7) are presented here:
2022 FORM 1040 Lines 1 through 7:
If the total amount of ordinary dividends is greater than $1,500 during 2022, then Schedule B of Form 1040 must be attached to Form 1040. The portion of the ordinary dividends that qualify for a “preferential” tax rate (a lower tax rate than the “ordinary” tax rate, explained below) are called “qualified dividends”. Qualified dividends are reported on in Box 1b of Form 1099-DIV and entered on line 3a of Form 1040.
What are “Preferential” Tax Rates?
Since 2003, lower tax rates have been applied to long-term capital gains (capital gains resulting from the sale of capital assets owned for more than one year) and qualified dividends. Theses “preferential” rates are lower than the “ordinary” tax rates applied to earned income (wages/salary), interest income. IRA and pension income, rental income, and Social Security income. The Tax Cuts and Jobs Act of 2017 retained the 0 percent, 15 percent and 20 percent rates on long-term capital gains and qualified dividends for individuals. For the years 2018 through 2025, these rates have their own brackets that are not tied to the ordinary income brackets
The following table presents the 2022 tax brackets (using an individual’s 2022 taxable income equal to the individual’s adjusted gross income less the appropriate standard deduction) for taxing long-term capital gains and qualified dividends:
The following two examples illustrate the difference in federal income taxes paid with respect to ordinary tax rates versus preferential tax rates:
Example 1. During 2022 Cecelia, who files her income taxes as single and is in a 22 percent federal marginal tax bracket. Her taxable income during 2022 was $72,000. She received $3,000 in qualified dividends. Cecelia will pay on her 2022 federal income the following tax on the $3,000 of qualified dividends:
$3,000 times 15 percent, or $450
Example 2. During 2022, William who files his income taxes as married filing jointly is in a 24 percent federal marginal tax bracket. His and his spouse’s 2022 taxable income was $195,000. They received $3,000 in taxable interest income. William and his spouse will pay on their 2022 federal income tax return the following tax on the $3,000 of interest income:
$3,000 times 24 percent, or $720
Note that had William and his spouse received the same $3,000 in the form of qualified dividends, they would have paid a federal income tax of:
$3,000 times 15 percent, or $450 (a difference of $270)
How Does an Ordinary Dividend Be Classified as a Qualifying Dividend?
In order for an ordinary dividend to be a qualifying dividend, the stock dividend must meet the following requirements:
(1) The dividend must be paid by a US corporation or a qualified foreign corporation;
(2) The owner of the stock paying the dividend must have owned the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date and ends 60 days after the ex-dividend date;
(3) Foreign dividends qualify only if the stock is traded on a US stock exchange; and (4) Capital gains distributions, distributions from tax-exempt entities, dividends from mutual insurance companies, and dividends from certain Employee Stock Ownership Plans (ESOPs) are not considered Qualified Dividends.
Dividends from Credit Unions/Life Insurance
Dividends from credit unions are payments of interest and are reported on line 2b of Form 1040 as interest income.
Dividends on certain life insurance casualty insurance policies that are paid out by the insurance company to the insurance policyholder are a “return of premium” and not income until the dividends exceed the policyholder’s total premium payments. However, any interest paid on accumulated dividends is taxable as interest income in the year paid.
Internal Revenue Code (IRC) Section 199A Dividends
Box 5 of Form 1099-DIV reports qualified Real Estate Investment Trust (REIT) dividends. The individual who owns this qualified REIT and received these dividends is eligible for the Section 199A deduction for qualified business income. A qualified REIT dividend is any dividend from a REIT that is not a capital gain dividend or a qualified dividend. The Section 199A dividends are included in box line 1a (total ordinary dividends) of Form 1099-DIV.
Mutual Fund/REIT Dividends Received in January 2023
Dividends that were declared by a mutual fund or a REIT in the last quarter of 2022 but actually paid in January 2023 are treated as paid in 2022 and therefore should be included on the 2022 federal income tax return as dividend income.
1. A non-dividend distribution is not paid out of the earnings and profits of a corporation or a mutual fund. The stock or mutual fund owner should receive a Form 1099-DIV or other statement showing the non-dividend distribution. On Form 1099-DIV, a nondividend distribution is shown in Box 3. If no Form 1099-DIV or statement is issued, then the recipient of the nondividend reports the distribution as an ordinary dividend on line 3b of Form 1040.
2. A nondividend distribution from a stock reduces the cost basis of the stock until the cost basis of the stock (the price paid for the stock) is fully recovered. This nontaxable portion is called a return of capital.
3. Liquidating distributions – sometime called liquidating dividends – are distributions received during a partial or complete liquidation of a corporation. These distributions are, or at least in part one form of a return of capital The stock owner will receive a Form 1099-DIV from the corporation showing the amount of the liquidation distribution in Box 9 or 10.
4. Distributions by a corporation of its own stock are commonly known as stock dividends. Stock rights (also known as “stock options”) are distributions by a corporation of rights to acquire the corporation’s stock. Stock dividends and stock rights are generally not taxable.