Qualified and ordinary dividend understanding

[35andFI]

So I am using a tax software to do my taxes but am also manually going through the 1040 to strengthen my overall understanding.

One thing that I don't understand is line 6 that reads: "Total income. Add lines 1 through 5."

Line 3a is where I put Qualified dividends and line 3b is where I put Ordinary dividends.

Aren't qualified dividends a subset of ordinary dividends?

If I add lines 1 through 5, wouldn't that be adding qualified and ordinary dividends to the total income?

Looking at the 1040, I do not see any tax benefit to qualified (vs ordinary) dividends but I understand that they are supposed to be taxed favorably.

Can someone help me understand this one?

[peeps_be_peeping]

Qualified dividends are taxed at the capital gains rate while ordinary dividends are taxed at your income rate. So qualified are not a subset of ordinary.

[walkwalkwalk]

Qualified dividends are taxed at the capital gains rate while ordinary dividends are taxed at your income rate. So qualified are not a subset of ordinary.

Was that a typo? Because qualified dividends ARE a subset of ordinary (meaning we are not adding both)

[terran]

Right, qualified are a subset of ordinary on which you pay at capital gains rates (so ordinary minus qualified are non-qualified dividends on which you pay at regular income tax rates). All dividends count towards AGI which effects certain phase outs, credits, etc which is why you add all ordinary dividends. This will end up in taxable income, but there's a worksheet you'll fill out to figure you tax which will remove qualified dividends and apply the capital gains rates to them.

[MDM]

So I am using a tax software to do my taxes but am also manually going through the 1040 to strengthen my overall understanding.

One thing that I don't understand is line 6 that reads: "Total income. Add lines 1 through 5."

Line 3a is where I put Qualified dividends and line 3b is where I put Ordinary dividends.

Aren't qualified dividends a subset of ordinary dividends?

If I add lines 1 through 5, wouldn't that be adding qualified and ordinary dividends to the total income?

Looking at the 1040, I do not see any tax benefit to qualified (vs ordinary) dividends but I understand that they are supposed to be taxed favorably.

Can someone help me understand this one?

The instruction for line 6 is poorly worded.  It means "add lines 1, 2b, 3b, 4b, and 5b."

[MustacheAndaHalf]

Looking at the 1040, I do not see any tax benefit to qualified (vs ordinary) dividends but I understand that they are supposed to be taxed favorably.
Can someone help me understand this one?

Did you reach the Qualified Dividends and Capital Gain Tax Worksheet?  It kicks in near lines 43-44 of IRS form 1040:
https://apps.irs.gov/app/vita/content/globalmedia/capital_gain_tax_worksheet_1040i.pdf

Think of it like calculating your taxes normally, then calculating them a second time applying lower rates to capital gains and qualified dividends.

[markbike528CBX]

Looking at the 1040, I do not see any tax benefit to qualified (vs ordinary) dividends but I understand that they are supposed to be taxed favorably.
Can someone help me understand this one?

Did you reach the Qualified Dividends and Capital Gain Tax Worksheet?  It kicks in at line 11 near lines 43-44 of IRS form 1040: page 40 of the general instructions for 2018.
https://apps.irs.gov/app/vita/content/globalmedia/capital_gain_tax_worksheet_1040i.pdf

Think of it like calculating your taxes normally, then calculating them a second time applying lower rates to capital gains and qualified dividends.

The 1040 is significantly different this year.

The Qualified Dividends and Capital Gain Tax Worksheet gets ordinary capital gains and dividends at higher rates ( typically 15%) than qualified dividends ( which can be as low as 0%).

There is an equivalent Schedule D worksheet (sometimes not needed even if filing Schedule D)

[terran]

Looking at the 1040, I do not see any tax benefit to qualified (vs ordinary) dividends but I understand that they are supposed to be taxed favorably.
Can someone help me understand this one?

Did you reach the Qualified Dividends and Capital Gain Tax Worksheet?  It kicks in at line 11 near lines 43-44 of IRS form 1040: page 40 of the general instructions for 2018.
https://apps.irs.gov/app/vita/content/globalmedia/capital_gain_tax_worksheet_1040i.pdf

Think of it like calculating your taxes normally, then calculating them a second time applying lower rates to capital gains and qualified dividends.

The 1040 is significantly different this year.

The Qualified Dividends and Capital Gain Tax Worksheet gets ordinary capital gains and dividends at higher rates ( typically 15%) than qualified dividends ( which can be as low as 0%).

There is an equivalent Schedule D worksheet (sometimes not needed even if filing Schedule D)

Other than minor changes in where the brackets are, there's no change this year in how capital gains are taxed. Short term capital gains and non-qualified dividends are still taxed at ordinary income tax rates. Long term capital gains are still taxed at 0%, 15%, or 20% depending on total taxable income, with an extra medicare tax at especially high incomes.

[35andFI]

This will end up in taxable income, but there's a worksheet you'll fill out to figure you tax which will remove qualified dividends and apply the capital gains rates to them.

Thanks. After reading this, I found the Qualified Dividends and Capital Gain Tax Worksheet for 2018 and used that.

The instruction for line 6 is poorly worded.  It means "add lines 1, 2b, 3b, 4b, and 5b."

I agree. This helped though. Thank you.

Did you reach the Qualified Dividends and Capital Gain Tax Worksheet?  It kicks in near lines 43-44 of IRS form 1040:
https://apps.irs.gov/app/vita/content/globalmedia/capital_gain_tax_worksheet_1040i.pdf

I have now! That one was for 2017 though. Looks like instead of line 44, the 2018 1040 has it in line 11a.

After fixing line 11a, the return from the 1040 that I did by hand matches the return that I am getting from the tax software.
Very cool. Thanks again everyone!

[MustacheAndaHalf]

Good point, I see the 2018 version here (for others who haven't visited it yet):
https://taxmap.irs.gov/taxmap/instr/i1040gi-015.htm#w24811v12

[peeps_be_peeping]

Qualified dividends are taxed at the capital gains rate while ordinary dividends are taxed at your income rate. So qualified are not a subset of ordinary.

Was that a typo? Because qualified dividends ARE a subset of ordinary (meaning we are not adding both)

Yes, you're right. Serves me right trying to answer a question on the internet.

[walkwalkwalk]

Qualified dividends are taxed at the capital gains rate while ordinary dividends are taxed at your income rate. So qualified are not a subset of ordinary.

Was that a typo? Because qualified dividends ARE a subset of ordinary (meaning we are not adding both)

Yes, you're right. Serves me right trying to answer a question on the internet.

It's okay. Just keep on peeping! lol