Planning for 2025 Taxes: Non-qualified Dividends

[Solomon960]

Greetings, MMM Community.

At the end of 2024, I severed ties with all non-dividend paying equities - incurring a giant loss ($18K) - and promptly put my remaining resources into monthly dividend paying ETFs. The result: I have received over $18K in 'non-qualified' dividends so far in 2025. Projected through December 31st, I will receive over $30K in 'non-qualified' dividends.

Questions:

1. I read that a citizen who owes more than $1K in taxes for the prior earning year is subject to a 10% or 20% penalty. If this is true, what strategy can I implement now to avoid said penalty?

2. I suspect I must begin making estimated quarterly taxes to avoid any penalty; are payments accepted electronically or only through mail?

Thanks to the generous married standard deduction, in previous years, our annual taxable income ranged between $25K-30K. This change in investment strategy will 'double' both our taxable balance and our federal tax owed. It is a fair tradeoff, especially considering after two years of dividends, I will overcome my lifetime's capital loss balance (-$45K).

Thank you for your attention and feedback.

[MDM]

1. How do you know they will be treated as non-qualified when you receive your 2025 1099-DIV?

2. See Safe harbors.  Can you adjust withholding to meet one of those?

[secondcor521]

Questions:

1. I read that a citizen who owes more than $1K in taxes for the prior earning year is subject to a 10% or 20% penalty. If this is true, what strategy can I implement now to avoid said penalty?

2. I suspect I must begin making estimated quarterly taxes to avoid any penalty; are payments accepted electronically or only through mail?

Answers:

1.  That's not accurate.  If you have a balance owing of more than $1K then you *may* owe an underpayment penalty if you don't meet any of the several safe harbors that @MDM linked to.  And the underpayment penalty is essentially accumulated interest on the taxes you "borrowed" from the federal government by not paying on time.  The interest rate varies but is only 7% annually currently.  So depending on how fast you pay, it might only be a few percent in total.

2.  You can pay electronically or by mail.  See https://www.irs.gov/payments.

[Solomon960]

Thank you for pointing me to "safe harbors," MDM and secondcor521. Unfortunately, I don't comprehend how any of the three conditions could apply to me. The only withholding in force is my W-4 "Single or Married filing separately" designation - I doubt that amount will be 90%+ for 2025 due to the dividend balance effectively 'doubling' my annual taxable income.'

In response to your question, MDM, I reviewed the 1099-DIV for 2024 from my brokerage provider: all dividends were "ordinary" (non-qualified). I began moving assets into my current monthly dividend paying ETFs last fall; based on the fixed nature of these assets, it is reasonable to believe that no change in classification will occur to the monthly shareholder payouts.

If a comprehensive tool was available to estimate my annual tax due based on all sources of income, I could determine in advance how much federal taxes I owe and input figures into my W-4's "Step 4 (Optional): Other Adjustments" "(a) Other income (not from jobs)" and/or "(c) Extra withholding" lines. With >$30K in non-qualified dividends, we will remain in the 12% tax bracket for 2025.

[MDM]

Thank you for pointing me to "safe harbors," MDM and secondcor521. Unfortunately, I don't comprehend how any of the three conditions could apply to me. The only withholding in force is my W-4 "Single or Married filing separately" designation - I doubt that amount will be 90%+ for 2025 due to the dividend balance effectively 'doubling' my annual taxable income.'

What about the "100%/110% of last year's tax" harbor?

In response to your question, MDM, I reviewed the 1099-DIV for 2024 from my brokerage provider: all dividends were "ordinary" (non-qualified). I began moving assets into my current monthly dividend paying ETFs last fall; based on the fixed nature of these assets, it is reasonable to believe that no change in classification will occur to the monthly shareholder payouts.

Qualified dividends are also ordinary dividends.  Are you saying that your 1099-DIV had a number in box 1a but nothing in box 1b?  Most dividends from total stock market, S&P 500, and similar funds are qualified, but if you have "fancier" investments then you may be paying the price of having all non-qualified dividends.

If a comprehensive tool was available to estimate my annual tax due based on all sources of income, I could determine in advance how much federal taxes I owe and input figures into my W-4's "Step 4 (Optional): Other Adjustments" "(a) Other income (not from jobs)" and/or "(c) Extra withholding" lines. With >$30K in non-qualified dividends, we will remain in the 12% tax bracket for 2025.

I'm biased, but do think the Case Study Spreadsheet will do exactly what you want here.  If you can't use Excel, consider ones covered in Tax estimation tools - Bogleheads.

[secondcor521]

I use the Case Study Spreadsheet (CSS) personally and really like it (thanks @MDM, I probably owe you a beer or coffee).  I will mention to OP that the way the IRS talks about dividends, how they're reported on tax forms, and how they are entered into the CSS might be a bit confusing to someone the first time.  So make sure if you use that tool that you understand what's going on.  The best way I have found to do this is to enter the numbers for the prior tax year (2024 in this case) from your tax return into the CSS, and make sure that the CSS gives you the same tax liability as shown on your 1040.  Then you can hopefully switch to tax year 2025 and enter the proper numbers in the proper place.

(@MDM, I don't recall details, I have to figure it out again for myself every December, but I think users might not be able to enter ordinary and qualified dividends directly into the CSS.  IIRC I have to enter one or the other of those into the columns on the left, then do the appropriate math and enter the difference in another cell somewhere.  I hope you know what I'm referring to.)

[MDM]

I use the Case Study Spreadsheet (CSS) personally and really like it (thanks @MDM, I probably owe you a beer or coffee).  I will mention to OP that the way the IRS talks about dividends, how they're reported on tax forms, and how they are entered into the CSS might be a bit confusing to someone the first time.  So make sure if you use that tool that you understand what's going on.  The best way I have found to do this is to enter the numbers for the prior tax year (2024 in this case) from your tax return into the CSS, and make sure that the CSS gives you the same tax liability as shown on your 1040.  Then you can hopefully switch to tax year 2025 and enter the proper numbers in the proper place.

Good advice!

(@MDM, I don't recall details, I have to figure it out again for myself every December, but I think users might not be able to enter ordinary and qualified dividends directly into the CSS.  IIRC I have to enter one or the other of those into the columns on the left, then do the appropriate math and enter the difference in another cell somewhere.  I hope you know what I'm referring to.)

Yes, cell D23 is for "Taxable Interest, non-qual. dividends, etc.".  And as the note attached to that cell says, "The non-qualified dividend amount is the difference between boxes 1a and 1b on a 1099-DIV."

If you have $100 in taxable interest, $200 in 1099-DIV box 1a, and $180 in 1099-DIV box 1b, your could enter
=100+20 in cell D23, and
180 in cell D25,
or
=100+(200-D25) in cell D23, and
180 in cell D25
if you want Excel to do the subtraction for you. ;)