Author Topic: Ordinary/Qualified Dividends  (Read 676 times)

Edwards

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Ordinary/Qualified Dividends
« on: February 14, 2024, 12:52:13 PM »
I used a program to help complete my taxes this year, but I have been reviewing the numbers to better understand how they are calculated.
While doing so, I noticed something odd about my ordinary and qualified dividends.

1. I believed that qualified dividends would not be taxed. Is this belief correct?

If qualified dividends should not be taxed, it appears that mine were not subtracted from the total dividend amount.
The $4,288 number is the total amount of dividends (including qualified).

2. Am I understanding incorrectly or has there been an error somewhere?
I filled out the form exactly as instructed, using my Vanguard 1099-DIV.

Thanks in advance for any help. If you need additional information please let me know and I will supply it.
Please forgive me for any dumb questions, I'm just really trying to fully understand the minutiae of taxes so I can better control it.

kingxiaodi

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Re: Ordinary/Qualified Dividends
« Reply #1 on: February 14, 2024, 01:23:44 PM »
There are certainly more qualified and knowledgeable individuals than me on the forum, but here's my understanding.

1. I believed that qualified dividends would not be taxed. Is this belief correct?

Qualified dividends are taxed at a different rate than income. In 2023, individuals with total income of $44,625 or less pay 0% tax on qualified dividends (source, section 3.03 Maximum Capital Gains Rate, page 8) Given the income you are reporting here, I believe you are correct that you should not be paying taxes on qualified dividends.

If qualified dividends should not be taxed, it appears that mine were not subtracted from the total dividend amount.
The $4,288 number is the total amount of dividends (including qualified).

2. Am I understanding incorrectly or has there been an error somewhere?
I filled out the form exactly as instructed, using my Vanguard 1099-DIV.

While you should not be paying taxes on QDs (and likely are not), they do still contribute to AGI (line 10) and to taxable income (line 15), which is why they are not subtracted at this point of the 1040. As far as I understand, calculating taxes on QDs is done on the Qualified Dividends and Capital Gains worksheet (see page 37 of the 1040 instructions), which your program likely filled out.

If you have any doubts about the program, I suggest working through the entire 1040 manually. I've linked the instructions above. You could also fill out only the worksheet and confirm that the tax the program suggests you pay matches what you calculate.

seattlecyclone

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Re: Ordinary/Qualified Dividends
« Reply #2 on: February 14, 2024, 02:13:28 PM »
At your income level this qualified dividend income should be taxed at 0%, but it's still income. It still therefore is included toward your AGI and taxable income figures on Page 1 of the 1040.

The real test would be to look at the tax amount on the top of Page 2. You should only be taxed on (taxable income - qualified dividends), or $3,798 in your case. The tax table amount for that income is $378. Is this the amount you're seeing?

Edwards

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Re: Ordinary/Qualified Dividends
« Reply #3 on: February 14, 2024, 02:46:06 PM »
At your income level this qualified dividend income should be taxed at 0%, but it's still income. It still therefore is included toward your AGI and taxable income figures on Page 1 of the 1040.

The real test would be to look at the tax amount on the top of Page 2. You should only be taxed on (taxable income - qualified dividends), or $3,798 in your case. The tax table amount for that income is $378. Is this the amount you're seeing?

Yes, that is correct!
Only 378 is showing at the top of page 2 (line 16).

Your advice helps a great deal in better understanding my taxes. Thanks so much!

Edwards

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Re: Ordinary/Qualified Dividends
« Reply #4 on: February 14, 2024, 02:47:42 PM »
There are certainly more qualified and knowledgeable individuals than me on the forum, but here's my understanding.

1. I believed that qualified dividends would not be taxed. Is this belief correct?

Qualified dividends are taxed at a different rate than income. In 2023, individuals with total income of $44,625 or less pay 0% tax on qualified dividends (source, section 3.03 Maximum Capital Gains Rate, page 8) Given the income you are reporting here, I believe you are correct that you should not be paying taxes on qualified dividends.

If qualified dividends should not be taxed, it appears that mine were not subtracted from the total dividend amount.
The $4,288 number is the total amount of dividends (including qualified).

2. Am I understanding incorrectly or has there been an error somewhere?
I filled out the form exactly as instructed, using my Vanguard 1099-DIV.

While you should not be paying taxes on QDs (and likely are not), they do still contribute to AGI (line 10) and to taxable income (line 15), which is why they are not subtracted at this point of the 1040. As far as I understand, calculating taxes on QDs is done on the Qualified Dividends and Capital Gains worksheet (see page 37 of the 1040 instructions), which your program likely filled out.

If you have any doubts about the program, I suggest working through the entire 1040 manually. I've linked the instructions above. You could also fill out only the worksheet and confirm that the tax the program suggests you pay matches what you calculate.


Thank you for the suggestions!
While I believe my fears have subsided, I will go ahead and go through the entire 1040 manually (as you suggested). This will help me learn how the calculations are made. I appreciate the help. Take care!

MustacheAndaHalf

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Re: Ordinary/Qualified Dividends
« Reply #5 on: February 17, 2024, 05:37:01 AM »
An alternative trick I've used with tax software : create a separate save file for experimenting.  Then you can subtract the qualified dividends from total dividends, and use zero for qualified dividends.  Does the total tax change?  What if you keep qualified dividends at zero, but increase total dividends?

Tax software can simulate different things you want to try out.