How are Dividends Taxed?

Nashua, NH Resident Wants to Be Prepared for the End of the Year

Dividends are typically considered taxable income for the year that they are received and will be taxed
at the end of the tax year. Even if the money was not received in cash, being reinvested buying more
shares, it will still need to be reported and will most likely be subject to taxes. How this money is taxed
depends on your taxable income and filing status. The dividends will be considered either nonqualified
or qualified. Qualified dividends usually have a lower tax rate, 0% 15%, or 20% depending on your
income level. Nonqualified dividends are taxed at the same rate as your regular income.

A Nashua resident was enjoying the fruits of his investments in the form of dividends. Concerned how
this might affect his tax bill at the end of the year, he contacted Merrimack Tax Associates for advice.

Understanding Qualified vs. Nonqualified Dividends

Qualified dividends are taxed as long-term capital gains. To be a qualified dividend the money must be
paid by a US corporation. The stock must have been owned for at least sixty days, with preferred stocks
having a slightly longer holding period. Dividends may be unqualified if they are paid on bank deposits
or from tax-exempt organizations and do not meet these specifications of qualified dividends.

It can be difficult for the average person to understand whether dividends are qualified or unqualified.
At the end of the year, you will receive a form 1099-DIV from the company paying dividends. Any
qualified dividends will be shown in Box 1B, where unqualified dividends will be noted in Box 1A.

For those who are expecting a large amount of dividends, you may want to seek professional tax advice
for ways to reduce the tax paid on this money. In the case of the Nashua resident, they welcomed
guidance from the team at Merrimack Tax Associates. He now knows what to expect to pay in dividend
taxes and can plan accordingly.