How to Figure the Qualified Dividends on a Tax Return

Qualified dividends are taxed at a lower rate.

You may have received distributions from investments during the previous tax year. Although you might think of them as dividends, the IRS could classify them differently for tax purposes. In general, distributions are classified as non-dividends, ordinary dividends or qualified dividends. It is important to identify and claim your qualifying dividends because they are taxed at a lower rate than ordinary dividends.

Things You'll Need

• Computer
• Internet access
• Printer
• Calculator
• Personal financial records

Instructions

1. Gather all documents relating to distributions that you received for the tax year in question. You should have received a Schedule K-1 (Form 1065) or Schedule K-1 (Form 1120S) for each dividend received from a partnership, estate, trust or S corporation, or a Form 1099-DIV for distributions of $10 or more from other sources. You will also need to gather records of the values of any minor distributions (under $10) that otherwise would have been reported on Form 1099-DIV.

2. Remove the records of any distributions that do not qualify as dividends for tax purposes. A distribution does not qualify as a dividend if it represents a "return of capital" -- that is, if the distribution reduces the value of the stock you hold in the company. The remainder of your distributions qualify as either ordinary or qualified dividends.

3. Identify which of your 1099-DIV dividends are candidates for qualified dividends. These candidates are listed in Box 1b. All qualified dividends for the distribution in question should be reported there. However, Box 1b might also report some dividends that the IRS would classify as ordinary.

4. Sum the total of the dividends that are reported in Box 1b that would otherwise be classified as ordinary dividends by the IRS. The rules on this are rather complex, but they are described on Form 1040 Instructions and IRS Publication 550. Subtract this sum from the total amount of dividends reported in Box 1b. The remainder represents the value of all qualified dividends that were reported on Form 1099-DIV.

5. Determine which of the dividends listed on your Schedule K-1 documents are qualified by referring to Box 6b (Form 1065) or Box 5b (1120S) and using the procedure described in Step 4.

6. Sum the total of all minor dividends that you received (under $10) that would otherwise be reported on Form 1099-DIV. Determine which of these actually represent qualified dividends using the procedure described in Step 4.

7. Add together the subtotals from steps 4, 5 and 6 above. The grand total represents the total amount of your qualified dividends.

Tips & Warnings

• Refer to the IRS 1040 instructions for an explanation of how to calculate your tax liability for qualified dividends.

• You are required to report all taxable dividends (both ordinary and qualified) even if you do not receive Form 1099--DIV or Schedule K-1 for them.

Resources

• IRS Publication 550 (Investment Income and Expenses)
• IRS 1040 Instructions (2010)