Qualified Dividend & Capital Gain Tax Worksheet: Guide on the Basics

A qualified dividend worksheet is an important document that helps taxpayers accurately calculate their tax liability for qualified dividends and capital gains. In this article, we will provide a detailed overview of the Qualified Dividend and Capital Gains Worksheet and explain how it works.

Qualified Dividend & Capital Gain Tax Worksheet: Guide on the Basics

What Are Qualified Dividends and Capital Gain Tax?

The IRS qualified dividends and capital gains tax are the two distinct types of taxes applied to certain types of investments:

For qualified dividends, tax is calculated at a lower rate than for ordinary income. On average, these are dividends paid by a domestic corporation, a qualified foreign organization, or a regulated investment company (RIC). Qualified dividends are usually taxed at the same rate as long-term capital gains.

Capital gains tax serves to report investments held for a period exceeding a year. The tax rate for capital gains depends on the investor’s income and the type of assets.

What Is Qualified Dividend and Capital Gain Tax Worksheet?

The Qualified Dividends and Capital Gain Tax Worksheet is an IRS form that helps taxpayers estimate their tax accountability on capital gains and qualified dividends. The latter are dividends that qualify for specific tax treatment.

What Is Qualified Dividends Worksheet For?

You need the Qualified Dividend and Capital Gain Tax Worksheet if you want to calculate your tax liability on qualified dividends and capital gains. This form takes into account your filing status, income, and other factors. If you receive income above the designated threshold, you may also use this document to estimate the alternative minimum tax. 

How to Use Qualified Dividends and Capital Gain Tax Worksheet

The form is organized into several sections. You need to separate your ordinary dividends from qualified ones. Ordinary dividends are taxed as common income. Any returns received on preferred or common stock are considered ordinary dividends if they meet the corresponding requirements from the IRS. 

To distinguish your ordinary and qualified dividends correctly, you need to place them into specific lines of the IRS qualified dividends and capital gain tax worksheet:

  • Lines 1-7 are for both ordinary and qualified income; 
  • Lines 8-11 refer to non-taxable qualified revenue;
  • In lines 12-14, you have to include qualified taxable income; 
  • Lines 15-19 are for the 15% bracket qualified income; 
  • In lines 19-23, you must specify the qualified tax;
  • Line 24 serves to report your income tax. There is no separate worksheet for calculating your income tax loan. 
  • In lines 25-27, you have to calculate the total tax.

Once you separate your ordinary dividends from qualified ones, you may proceed to fill out the form: 

  1. Start by filling out lines 1-7 with your ordinary income and qualified revenue. Include wages, salaries, tips, and other relative, taxable income. 
  2. In lines 8-11, enter the total of your non-taxable qualified income. This may include contributions to a retirement plan, interest from tax-exempt bonds, and other types of non-taxable income.
  3. In lines 12-14, enter the total of your qualified taxable income. Remember to specify qualified dividends and capital gains. 
  4. Enter the 15% bracket qualified income in lines 15-19. This includes revenue up to the 15% tax bracket. 
  5. Lines 19-23 require the total of your qualified tax. Mention taxes on qualified dividends and capital gains.
  6. Enter the total of your income tax owed in line 24. The sum will depend on your total taxable revenue, filing status, and other factors. 
  7. In lines 25-27, provide the total of your tax. Basically, this is the entire amount of taxes you owe.

Requirements for Qualified Dividends

Certain dividends are automatically exempt from qualification. These include gains paid by real estate investment trusts, earnings on employee stock options, and dividends for tax-exempt organizations. 

If you get dividends from a money market account such as a credit union, savings bank, or another financial institution, you have to report them as interest income. These earnings are not qualified, as well as specific one-time dividends. 

To take advantage of the reduced tax rate on qualified dividends, you have to meet the IRS holding period requirements:

  • If you are a common stock investor, the holding period is over 60 days within a 121-day period that begins 60 days prior to the ex-dividend date; 
  • For preferred stock investors, the holding period is over 90 days within a 181-day term that starts 90 days preceding the ex-dividend date; 
  • The holding period requirements differ for mutual funds. The company must have been held unhedged for no less than 61 days of a certain period, and the investor must hold the applicable share of the mutual fund for the same term. 

How to Avoid Tax on Dividends

To boost your income without having to pay any taxes, you might want to consider tax-free dividends. There are three ways to avoid paying taxes on dividends: 

  • If your taxable income lies within the lowest three brackets and doesn’t exceed $79,999, all qualified dividend payments are eligible for a 0% tax rate; 
  • Dividend payouts from stocks held in tax-deferred accounts (e.g. 401(k), Roth IRA, and college savings plans) are not subject to dividend tax; 
  • Lastly, if the dividend is a non-taxable return of equity (the investor is receiving a part of the dedicated money instead of a distribution of earnings), it is considered tax-free by the Internal Revenue Service.

Earn More, Pay Less, Stay Legal

Understanding how to report qualified dividends can help you make conscious decisions when it comes to investing and managing your taxes. By following our expert guidelines, you can maximize your savings and minimize your tax payments. Now you can make the most out of your investments and ensure that you are paying the right amount of taxes.