How do I separate Qualified Dividends from Ordinary Dividends on Form 1040?

[frugaliknowit]

Hi.  My amounts this year are small.  Last year even smaller, so I just ran it through as ordinary since I did not want to hire an accountant...

My confusion:  Line 3A:  Qualified Dividends (a subset of Ordinary Dividends as I understand it).
Line 3B:  Ordinary Dividends.

Let's pretend Ordinary Dividends is $300 and Qualified Dividends is $100.  How do I apply the lower rate to the $100, while paying the regular rate on the $200?  I read through the 1040 instructions and was not enlightened on how to do this.

Can someone walk me through the above or tell me of a worksheet/form that I can use?  My amounts are very small at this point (since this only applies to my taxable), but will be growing pretty quickly. 

Thanks if you can help!

[braje]

Have you looked at the instructions for the 1040? https://www.irs.gov/pub/irs-pdf/i1040gi.pdf  page 40

[terran]

All ordinary dividends go on 3b, qualified dividends (which are subset of ordinary dividends) go on 3a. The preferential treatment of qualified dividends happens when you calculate your total tax using the Qualified Dividends and Capital Gain Tax Worksheet in the instructions.

[phildonnia]

Have a look at the Qualified Dividends and Capital Gain Tax Worksheet on in the 1040 instructions (Pg 40).

Qualified dividends are entered on line 2 of the worksheet, and then they end up being subtracted from your taxable income on line 7.    That's where the magic happens.   A similar calculation happens on the Schedule D worksheet if you use that.

If you're getting confused, take heart, everybody else finds it just as confusing.  Once you do your taxes a few times, it starts to make a little sense.

[MustacheAndaHalf]

Since others provided specific references, let me just give the overview.  You start doing taxes and thinking the IRS has forgotten that your investments have special tax benefits.  Those are only calculated later, because those benefits may go away for people impacted by AMT.  So the calculations can't just be at a lower rate, and then merged with other information.  There's a later point which might give you an "ah ha!" moment: the IRS asks you to take the lower of two amounts of tax.  So you figure your tax as if investments had no tax benefit, and then calculate taxes at better rates (and maybe calculate AMT as well).

If the IRS removed the lower capital gains taxes on accident, there would be a massive outcry that would pierce even the current always dramatic news cycle and require those involved to resign (partly because it would violate acts of Congress, and partly because it would be incompetent to miss such a massive mistake).  So if you're not hearing a massive outcry over capital gains rates, then that's further evidence that it gets calculated somewhere in form 1040.

Also, I know the feeling of not wanting to bother with extra forms to get small benefits.  Many years ago the foreign tax credit/deduction from international mutual funds has to be evaluated on a separate form with all foreign income (not just a one line entry), and the amount was too little to bother with so I just skipped it.

[frugaliknowit]

Have a look at the Qualified Dividends and Capital Gain Tax Worksheet on in the 1040 instructions (Pg 40).

Qualified dividends are entered on line 2 of the worksheet, and then they end up being subtracted from your taxable income on line 7.    That's where the magic happens.   A similar calculation happens on the Schedule D worksheet if you use that.

If you're getting confused, take heart, everybody else finds it just as confusing.  Once you do your taxes a few times, it starts to make a little sense.

That did it!!  Thanks all!!!:)

[firelyve]

I know this is old, but planning for upcoming taxes...

For most of my 1099-DIV forms, they have the same amount for ordinary dividends and qualified dividends, meaning that 100% are qualified (yes, all held over 1 year). 1040 asks that you enter both these numbers; qualified in 3a and ordinary in 3b.  3b is then added to total income.  I followed the worksheet for Qualified Dividends and Capital Gains, and have 0 tax liability.  However, I don't see where the ordinary dividends are then removed from my AGI (line 7 of 1040). 

For example, I have a stock with $100 in total dividends.  On the 1099-DIV it lists $100 as qualified and $100 as ordinary.  I enter both those on my 1099 (3a and 3b respectively).  3b is added to total income.  Even though the $100 of qualified dividends have 0 tax, the $100 of ordinary dividend, which is the same exact $100, stays in my AGI.  No difference here on fed income tax, but if they aren't actually removed from line 7 (AGI) then it impacts my state income tax in a big way.  Do I just have to bite the bullet on the state taxes???

[Morning Glory]

I know this is old, but planning for upcoming taxes...

For most of my 1099-DIV forms, they have the same amount for ordinary dividends and qualified dividends, meaning that 100% are qualified (yes, all held over 1 year). 1040 asks that you enter both these numbers; qualified in 3a and ordinary in 3b.  3b is then added to total income.  I followed the worksheet for Qualified Dividends and Capital Gains, and have 0 tax liability.  However, I don't see where the ordinary dividends are then removed from my AGI (line 7 of 1040). 

For example, I have a stock with $100 in total dividends.  On the 1099-DIV it lists $100 as qualified and $100 as ordinary.  I enter both those on my 1099 (3a and 3b respectively).  3b is added to total income.  Even though the $100 of qualified dividends have 0 tax, the $100 of ordinary dividend, which is the same exact $100, stays in my AGI.  No difference here on fed income tax, but if they aren't actually removed from line 7 (AGI) then it impacts my state income tax in a big way.  Do I just have to bite the bullet on the state taxes???

That is correct. Some states don’t make a distinction between short term and long term capital gains, or ordinary and qualified dividends (they treat all investment income the same as earned income). The lower capital gains tax rate is not a deduction, its just a lower rate. deductions (such as the IRA deduction) reduce AGI, and thus state income tax liability.  I paid a few thousand to state tax last year, and my federal tax liability was negative.

[seattlecyclone]

Yep, it's still income, just income with a federal tax rate of 0%. States can tax it as they like, and it also still counts toward things like ACA subsides that use your AGI as an input.

[firelyve]

Thanks 'staches.  Very helpful for a guy that's looking to cover all the bases before I quit my FT job in 6 months!!