What is Actually Taxable on a 1099-DIV? Avoid this Mistake + FAQs
- March 25, 2025
- 7 min read
Nearly every income item reported on a Form 1099-DIV is taxable under U.S. federal law.
Ordinary dividends, qualified dividends, and capital gain distributions on a 1099-DIV all count as taxable income. Even Section 199A dividends (like REIT distributions) are taxable, though they may qualify for a special deduction. The main exception is nondividend distributions (returns of capital), which are not immediately taxable – instead, they reduce your investment’s cost basis.
In short, if it’s a profit payout or gain reported on 1099-DIV, it’s generally taxable, while true return of capital or exempt-interest dividends are not taxed federally.
Millions of investors receive Form 1099-DIV each year, and many aren’t sure which numbers affect their tax bill. Understanding which parts of this form are taxable can save you from costly mistakes.
Below, we’ll break down every box on the 1099-DIV and clarify exactly what is (and isn’t) taxable, using clear examples and expert insights.
What you’ll learn in this article:
💡 Federal Tax Rules for Dividends: Exactly which 1099-DIV amounts Uncle Sam taxes (ordinary vs. qualified dividends, capital gains, etc.)
🌍 State-by-State Tax Differences: How each state treats dividend income (see the comprehensive table)
📖 Key Terms Glossary: Easy-to-understand definitions of REITs, mutual funds, Box 1a vs. 1b, and other important terms
📝 Real-World Scenarios: Three detailed examples (with tables) showing how different 1099-DIV situations are taxed in practice
🚫 Common Mistakes to Avoid: Expert tips on pitfalls when filing your taxes with a 1099-DIV (and answers to FAQs at the end)
1099-DIV Basics: Dividend Income and Taxability
Before diving into specifics, let’s recap what Form 1099-DIV is. Form 1099-DIV, “Dividends and Distributions,” is an IRS form sent by banks, brokers, mutual funds, or companies to investors who received over $10 in dividends or distributions during the year.
This form itemizes the types of payouts you received from investments (like stocks, mutual funds, or REITs). Each category on the form has different tax implications. Importantly, the IRS gets a copy of your 1099-DIV too – so it knows what investment income you should be reporting.
Key point: Virtually all amounts on a 1099-DIV represent income to you, and thus most are taxable. The form’s purpose is to tell you (and the IRS) how much dividend income, capital gain distributions, and other taxable distributions you got.
There are, however, a few special cases (like return of capital or tax-exempt interest dividends) that are reported on 1099-DIV but not taxed. We will highlight those exceptions. First, let’s break down each major category of the 1099-DIV and see which are taxable under federal law.
Taxable Dividends and Distributions (Federal Law Explained)
When you receive a 1099-DIV, it typically includes several boxes. The most common categories – ordinary dividends, qualified dividends, capital gain distributions, and Section 199A dividends – are all taxable income federally (just taxed at different rates or treated specially). Here’s a detailed look at each:
Ordinary Dividends (Box 1a) – Fully Taxable
Ordinary dividends are the total dividends paid to you from stocks or mutual funds. On Form 1099-DIV, Box 1a shows “Total Ordinary Dividends,” which includes all taxable dividends you received (except those explicitly designated as nondividend distributions). This amount is fully taxable income at the federal level. You’ll report it on your tax return (Form 1040) – it flows to line 3b of the 1040 as dividend income.
Tax treatment: Ordinary dividends are taxed at your ordinary income tax rate (the same rates as wages or interest). For example, if you’re in the 22% tax bracket, your ordinary dividends are generally taxed at 22% federally.
What qualifies as “ordinary”? Any dividend that isn’t classified as “qualified” under IRS rules (more on that next) is ordinary by default. This can include dividends from certain foreign corporations, dividends on stock you didn’t hold long enough, or REIT and mutual fund distributions that don’t meet qualified criteria. Even dividends paid in additional stock (stock dividends) could be taxable if you had the option to take cash instead – though pure pro-rata stock dividends are usually not taxable (per long-standing tax law).
Important: Reinvested dividends count as ordinary dividend income too. Just because you automatically reinvested dividends into more shares doesn’t mean you avoid tax – the IRS treats it as if you got the cash and then bought more stock. So, Box 1a includes reinvested amounts as well, all of which are taxable in the year received.
In short, Box 1a = taxable dividend income. Always include this amount on your return. There’s no special break on ordinary dividends at the federal level – they’re taxed just like other income (except when they qualify as “qualified dividends”, which are still income but get a lower rate).
Qualified Dividends (Box 1b) – Taxable at a Lower Rate
Qualified dividends are a subset of your ordinary dividends (they’re actually part of the Box 1a total) that meet certain IRS criteria for a lower tax rate. Box 1b on the 1099-DIV tells you the portion of your dividends that are “qualified.” These dividends are still taxable income (you must report them), but they are taxed at the preferential long-term capital gains tax rates rather than ordinary income rates.
Tax treatment: If you have qualified dividends, you effectively get a tax break. Instead of being taxed at your normal bracket (which could be as high as 37%), qualified dividends are taxed at 0%, 15%, or 20% depending on your taxable income level (mirroring the long-term capital gains rate structure). High earners may also owe the 3.8% Net Investment Income Tax on dividends, but that applies equally to qualified or ordinary – the key is the base federal rate is lower for qualified.
What makes a dividend “qualified”? Generally, it must be paid by a U.S. corporation or a qualified foreign corporation (a company incorporated in a country that has a tax treaty with the U.S., among other conditions). Also, you must have held the stock for a required holding period: typically more than 60 days during the 121-day period surrounding the ex-dividend date (for common stock). If you fail to meet this holding period (for example, you bought the stock and sold it just a few weeks around the dividend), the dividend is not qualified and should be taxed as ordinary. Brokers usually report most dividends as qualified if the stock was held in your account long enough, but if you switched brokers or had complex transactions, ensure you meet the criteria.
Reporting: On your Form 1040, you’ll list total dividends (Box 1a amount) on line 3b, and the qualified portion (Box 1b) on line 3a. The qualified amount isn’t subtracted or anything – it’s included in the total – but it’s noted separately because it gets the special tax rate when the IRS calculates your tax. So, yes, qualified dividends are absolutely taxable (common misconception: some think “qualified” means tax-free – not true!). They just enjoy a lower tax rate.
Example: You received $1,000 in total dividends, and Box 1b says $800 are qualified. You’ll pay, say, 15% federal tax on that $800 (if you’re in that bracket for capital gains), and the remaining $200 (non-qualified portion) gets taxed at your normal rate (e.g. 22%). All $1,000 was taxable income – just taxed differently.
Capital Gain Distributions (Box 2a) – Taxable Capital Gains
If you own mutual funds or ETFs (or certain investment trusts), you might see an amount in Box 2a “Total Capital Gain Distributions.” These are typically long-term capital gains that the fund realized and passed on to you. In plain language, when a mutual fund sells stocks or assets at a gain, it often distributes those gains to shareholders as capital gain dividends. The 1099-DIV treats these like a special kind of dividend.
Tax treatment: Capital gain distributions are taxable as long-term capital gains on your tax return, regardless of how long you personally held the fund shares. That means they get the favorable long-term capital gain tax rates (0%, 15%, or 20%, depending on your income, plus potential 3.8% NIIT for high earners). Even if you only held the mutual fund for three months, if the fund gives you a capital gain distribution from its long-term holdings, you get long-term gain treatment on it.
What’s included: Box 2a is the total of all types of capital gain distributions. This could come from stock mutual funds, REITs, or other regulated investment companies distributing profits from asset sales. It might also include long-term gains from trust liquidations or C-corp liquidations if reported as such. It’s important to note these are not gains from you selling your shares (those would be reported separately on a 1099-B). Capital gain distributions are the fund’s gains, taxed to you.
Related boxes (2b, 2c, 2d): Sometimes, 1099-DIV will break out specific components of the capital gain distribution:
Unrecaptured Section 1250 gain (Box 2b): This usually comes from sale of real estate property by a REIT or fund. This portion of gain, which relates to real estate depreciation recapture, is taxable at a maximum 25% federal rate (instead of the usual 15/20%). It’s still a taxable gain, just at a different cap (only relevant if you’re in a high bracket).
Section 1202 gain (Box 2c): This is rare for most investors – it pertains to qualified small business stock gains eligible for a special exclusion. If you see an amount here, it means part of your capital gain distribution was from Section 1202 stock sales. Typically, a percentage of such gain is excluded from tax (up to 50% or more), but the included portion is taxable. The details can get complex, but bottom line: if there’s an amount in 2c, that portion might have special tax rules but is generally still subject to tax (with exclusions applied).
Collectibles (28%) gain (Box 2d): This portion of your capital gain distribution is from sales of collectibles (e.g. certain coins, art, or even gold/silver ETFs that are treated as collectibles). Such gains are taxable at a maximum 28% rate if long-term. So if you see a number in 2d, that part of your distribution could be taxed up to 28% instead of 15/20%. It’s still a taxable gain; the higher rate cap reflects that collectibles don’t get the lowest capital gain rate beyond a certain point.
Most people only see an amount in Box 2a (the total), and perhaps nothing in 2b–2d unless they’re in specialized funds. But if present, all Box 2a distributions and its subsets are taxable income. On your 1040, capital gain distributions are reported (usually via Schedule D or directly on 1040) as long-term capital gains.
Note: It may feel unfair to pay tax on gains when you didn’t sell anything – for instance, your mutual fund sent you a $5,000 capital gain distribution after selling stock, but your fund’s share price also dropped that year. Unfortunately, tax law says you owe tax on those distributed gains regardless. This is a common surprise for fund investors.
Section 199A Dividends (Box 5) – Taxable (with a Possible Deduction)
Box 5 of Form 1099-DIV reports Section 199A dividends, sometimes labeled “Section 199A Qualified REIT Dividends.” These are typically dividends you got from REITs (Real Estate Investment Trusts) or certain publicly traded partnerships via mutual funds or ETFs. They’re called “199A dividends” because they qualify for the 20% QBI deduction under Section 199A of the tax code.
Tax treatment: A Section 199A dividend is taxable income, usually taxed at your ordinary income rate (just like an ordinary dividend). The twist is that you may deduct 20% of this amount when calculating taxable income, effectively only 80% of it is taxed. For example, if you have $100 of Section 199A dividends, you include $100 in your income, but then you likely get a $20 deduction elsewhere on your tax return (if eligible) – so you pay tax on the remaining $80. This deduction is part of the Qualified Business Income (QBI) deduction, and these REIT dividends are treated similarly to income from a pass-through business for this purpose.
Requirements: Unlike qualified dividends, there’s no special holding period rule to get the 20% deduction on REIT dividends; as long as it’s reported as a Section 199A dividend, you generally can take the deduction. However, you must file the appropriate forms (Form 8995 or 8995-A for QBI deduction) to claim it. Also, note that this deduction doesn’t reduce self-employment tax or anything – it’s just a personal income tax deduction.
Bottom line: Box 5 amounts are taxable. In fact, they’re taxed at your full ordinary rate before the deduction. You then subtract 20% of that amount as a deduction. So effectively, yes, you pay some tax on them, but less than you would on an equivalent ordinary dividend of the same amount. For high-income folks, note that the 20% REIT dividend deduction isn’t subject to the complex phaseouts that other QBI might be – it’s generally available to everyone regardless of income.
Example: You received $500 in REIT dividends reported in Box 5. You’ll report $500 as taxable income. If you qualify, you also deduct $100 (20%) under Section 199A. If you’re in the 24% tax bracket, you pay roughly $24% on $400 net (because $100 of it got deducted), which is effectively a ~19.2% rate on the full $500. So it’s a nice tax break, but remember: the full $500 was initially taxable income.
Other Taxable Items on 1099-DIV
Besides the big categories above, there are a few other items that might appear on your 1099-DIV which are also taxable or affect your taxes:
Federal Income Tax Withheld (Box 4): This isn’t income, but if you see an amount in Box 4, it means federal tax was withheld (perhaps due to backup withholding if you didn’t provide a correct SSN to the payer). While not income, it’s important to claim this withholding on your return as a tax payment. Don’t ignore it – you won’t be taxed on it (it’s already taken out), but you do get credit for it against your tax liability.
Liquidation Distributions (Boxes 8 and 9): These boxes report cash or noncash liquidation distributions – typically from a corporation or fund that is liquidating (winding down). These are a form of return of capital. They might or might not be immediately taxable:
If the liquidation distribution is less than or equal to your basis in the stock, then it’s essentially a non-taxable return of capital (reducing your basis to that extent, similar to a nondividend distribution).
If it exceeds your basis, the excess is a taxable capital gain (usually long-term if you held the stock > 1 year, short-term if <= 1 year). Essentially, once your entire investment has been returned, anything more is profit.
So, part of a liquidation distribution can be non-taxable (return of capital) and part taxable (gain). The form just reports the amounts distributed; you determine the taxability based on your basis. Be careful here and consult the company’s statements – often they’ll indicate how much of the liquidation is considered earnings (taxable) vs return of capital.
Foreign Currency Gain (rare on 1099-DIV): If you have certain trusts or funds, they might pass through a small foreign currency gain (sometimes shown on statements or supplementary info, not a numbered box on 1099-DIV). If so, those are taxable as ordinary income. This is not common for most stock or fund investors, but keep an eye on any footnotes or supplemental pages that come with the 1099-DIV.
In summary: Under federal law, if it looks like income on your 1099-DIV, assume it’s taxable unless explicitly labeled otherwise (like “nondividend distribution” or “exempt-interest”). Ordinary, qualified, capital gain, Section 199A/REIT dividends – they all go on your tax return as income. Now, let’s turn to those special cases that aren’t taxable (at least not immediately or not by the feds).
Non-Taxable or Special Cases on 1099-DIV (Returns of Capital, Exempt Interest, etc.)
Not everything on a 1099-DIV adds to your taxable income for the year. There are a few notable entries which are either tax-free, tax-deferred, or informational. It’s crucial to recognize these so you don’t mistakenly pay tax on something you shouldn’t (or fail to track it for future tax implications).
Nondividend Distributions (Box 3) – Return of Capital (Not Taxed Now)
Box 3 on the 1099-DIV is labeled “Nondividend Distributions.” This is the amount of any distribution that is not paid out of the company’s earnings and profits. In everyday terms, think of this as the company giving you some of your original investment back, rather than giving you profits. It’s often called a return of capital (ROC).
Tax treatment: Nondividend distributions are not taxable in the year you receive them. They do not count as income because they’re essentially a return of part of your cost. However – and this is important – a return of capital reduces your tax basis in the stock or fund. It’s like saying: now you’ve recovered part of what you invested, so your remaining investment is considered smaller.
Basis adjustment: By lowering your cost basis, a nondividend distribution sets you up for potentially higher capital gains when you eventually sell the stock. If you keep getting ROC distributions over time, you keep lowering your basis. Once your basis hits zero, any further nondividend distributions will be taxable as capital gains (because you’ve gotten all your original investment back at that point). At that stage, future “return of capital” money is actually beyond your capital – it’s gain.
Examples of return of capital: Many REITs and some MLPs (master limited partnerships) or certain funds pay distributions that exceed their current earnings, so a portion is classified as return of capital. For instance, if a REIT pays a $2 dividend per share but only $1 of it comes from current earnings, the other $1 might be a nondividend distribution. Your 1099-DIV would show $2 in box 1a, but $1 of that $2 in box 3 as nondividend. In that case, only $1 is taxable dividend; the $1 in box 3 is not taxed now (just reduce your basis by $1/share).
Important: Don’t accidentally include Box 3 amounts as income on your tax return. They are not reported as income. But do keep records of cumulative ROC received for each investment, as you’ll need it when calculating capital gain or loss upon sale. Your brokerage annual statement often tracks adjusted basis if you reinvest dividends, but it’s good to confirm.
To reiterate, nondividend distributions = tax-deferred return of your money. Enjoy not paying tax on it now, but remember it’s not “free money” – it lowers your basis, affecting future taxes.
Exempt-Interest Dividends (Usually Box 12) – Federally Tax-Exempt Income
If you invest in municipal bond funds, you might receive exempt-interest dividends. These are reported on Form 1099-DIV (often in Box 12). They represent the fund passing through interest from municipal bonds, which is generally tax-exempt at the federal level.
Tax treatment: Exempt-interest dividends are NOT taxable on your federal income tax return. They do not count in your gross income. For example, if a muni bond fund paid you $500 of interest dividends, that $500 is federal tax-free.
State tax note: While federal law exempts muni bond interest, your state may or may not tax this income. Often, a state will not tax interest from its own municipal bonds but will tax interest from other states’ bonds. If your fund holds bonds from many states, they usually provide a breakdown so you can figure out how much of that interest is from your state (which you might be allowed to exclude on your state return) and how much is from out-of-state (which your state might tax). This gets into state-specific rules (we’ll cover state taxation more in a later section with a table).
Private Activity Bonds (AMT): A portion of exempt-interest dividends might be from private activity bonds, which are a category of muni bonds that are subject to the Alternative Minimum Tax (AMT). This amount is often reported in a separate box (say Box 13) or in the footnotes of the 1099-DIV. If you’re not subject to AMT, you don’t worry about it. If you are, you’ll need to include that portion as taxable income for AMT purposes. This is a complex corner, but just be aware: the exempt-interest dividends are generally tax-free for regular tax, with the only wrinkle being AMT for certain high-income folks or those with lots of private activity bond interest.
Reporting: Even though it’s not taxable, you typically still report exempt-interest dividends on your 1040 (on the line for tax-exempt interest) to inform the IRS that you received it. It’s more of an informational reporting; it doesn’t increase your tax.
So, exempt-interest dividends from muni funds are one nice slice of 1099-DIV that’s federally tax-free (hence why people invest in muni bonds). Just check your state’s stance on those.
Foreign Tax Paid (Box 7) – Not Income (But Credit/Deduction Available)
Investors in international stocks or funds often have foreign taxes withheld on dividends by the foreign country. Box 7 of 1099-DIV, “Foreign Tax Paid,” shows how much was withheld for foreign taxes. For instance, if you own shares of a European company, that country might have taken a 15% cut of your dividend for their taxes before you got it.
Tax treatment: The amount in Box 7 is not taxable income to you. It’s not money you received – in fact, it’s money you never saw because it went to a foreign government. So you don’t include foreign tax paid as income. Instead, you generally can claim a U.S. tax credit or tax deduction for it.
Foreign tax credit: Most commonly, you’ll take a tax credit for foreign taxes paid on dividends. A credit directly reduces your U.S. tax liability, dollar for dollar, for the taxes paid abroad. For example, if $100 was withheld by foreign governments, you can often get a $100 credit against your U.S. taxes – essentially eliminating double taxation up to that amount. To claim the credit, you may need to file Form 1116 (Foreign Tax Credit) with your return, unless your total foreign taxes are small (under $300 single / $600 joint, in which case you can claim the credit directly without the form).
Deduction option: Alternatively, you could deduct the foreign tax paid as an itemized deduction (like a SALT tax deduction). However, taking the credit is usually more beneficial for most people, because a credit gives full value whereas a deduction only saves you your marginal rate percentage of the amount. You’d typically only deduct if you can’t use the full credit.
Summary: Box 7 doesn’t add to your taxable income – it’s actually there to help you get credit for taxes already paid. Be sure to utilize it so you’re not paying tax twice on the same income. For instance, if you got a $1,000 foreign dividend and $150 was taken out by the foreign country, your 1099-DIV might show $1,000 in dividends (which you’ll be taxed on by the U.S.) and $150 in foreign tax paid (which you can claim back as a credit, generally). The net effect is you pay U.S. tax on the $1,000 but get a credit for $150, so you’re not out more than you should be.
FATCA Filing Requirement (Box 11) – Informational
Some 1099-DIV forms have a Box 11 “FATCA filing requirement” checked off (FATCA stands for Foreign Account Tax Compliance Act). This is usually relevant only if you’re subject to certain foreign reporting. For individual taxpayers receiving a normal 1099-DIV, you typically don’t need to do anything with this box. It’s more for the IRS and the financial institution’s compliance. It does not affect your taxable income at all.
In summary, the non-taxable or special items on a 1099-DIV are: nondividend distributions (returns of capital) – not taxed now but reduce basis; exempt-interest dividends – federally tax-exempt; and foreign tax paid – not income, but a potential credit. Always differentiate these from the taxable categories we discussed earlier.
Next, let’s explore how these federal rules intersect with state taxes – because your state might have its own idea of what’s taxable.
State Taxation of Dividend Income (Does Your State Tax Your 1099-DIV?)
When it comes to state income taxes, dividends and capital gain distributions may be treated differently than at the federal level. Some states give breaks, but most states simply tax dividends as ordinary income. A few states don’t tax income at all, meaning your dividends are free from state tax. It’s important to know your own state’s rules so you can plan for that tax bite (or lack thereof).
Key points on state taxation of dividends:
No state special rate for qualified dividends: Unlike federal law (which has a special lower rate for qualified dividends and long-term gains), states generally do not distinguish – they tax dividends (qualified or not) at the same rate as your other income. That means if your state income tax rate is, say, 5%, you’ll typically pay 5% on dividends, even those that were “qualified” federally. There are exceptions in a couple of states that allow partial exclusions or have unique rules (which we’ll note).
States with no income tax: If you live in a state with no personal income tax (e.g., Florida, Texas), you won’t pay any state tax on dividends or any other income (hooray!). A related scenario: states like Tennessee and New Hampshire historically taxed dividends/interest even though they had no wage tax – but that’s changing (Tennessee repealed its dividend tax in 2021, and New Hampshire is phasing theirs out).
State exemptions and differences: Some states exempt certain types of dividends. For example, a state might exempt dividends from U.S. government obligations (like a mutual fund that holds U.S. Treasury bonds might be partly exempt at state level). Some states offer limited exclusions for retirement income which might include dividends in some cases. And as mentioned, if you have muni bond fund interest, the state might tax or not tax based on bond issuer’s origin.
Below is a state-by-state table summarizing how dividends are taxed in each state (for individual taxpayers). It indicates whether the state taxes dividend income and any special notes:
| State | State Tax on Dividends |
|---|---|
| Alabama | Yes – taxed as ordinary income (2%–5% progressive rate). |
| Alaska | No – no state income tax, so dividends are tax-free at state level. |
| Arizona | Yes – taxed as ordinary income under state’s tax brackets (2.59%–4.5%). |
| Arkansas | Yes – ordinary income rates (2%–4.9%). Note: Arkansas allows a 50% exclusion on long-term capital gains above $10 million (very high bar), but regular dividends get no special break. |
| California | Yes – fully taxed as ordinary income at 1% up to 13.3% (highest state bracket). No special rate for qualified dividends. |
| Colorado | Yes – taxed at flat 4.4% (state flat income tax rate) like any other income. |
| Connecticut | Yes – ordinary income rates (3%–6.99%). No special treatment for dividends. |
| Delaware | Yes – ordinary income rates (2.2%–6.6%). Dividends taxed like other income. |
| Florida | No – no state income tax on individuals, so no tax on dividends. |
| Georgia | Yes – ordinary income rates (1%–5.75%). Dividends included in taxable income. |
| Hawaii | Yes – ordinary income rates (1.4%–11%). Hawaii taxes dividends as regular income. (Hawaii provides some exclusions for certain stock options or ESOP dividends, but generally dividends are taxed.) |
| Idaho | Yes – ordinary income rates (1%–6%). Dividends taxed with other income. |
| Illinois | Yes – taxed at flat 4.95% (Illinois flat income tax). Dividends have no special rate. |
| Indiana | Yes – taxed at flat 3.15% (Indiana flat tax rate, as of recent law). Dividends included fully. |
| Iowa | Yes – ordinary income rates (4.40% flat as of 2023 reforms, transitioning to flat). Historically Iowa had high brackets (up to 8.5%) but is moving to flat ~3.9% by 2026. Dividends taxed as income. |
| Kansas | Yes – ordinary income rates (3.1%–5.7%). Dividends taxed normally. |
| Kentucky | Yes – flat 5% tax on income, including dividends. |
| Louisiana | Yes – ordinary rates (1.85%–4.25%). Dividends included. (LA offers a deduction for dividend income taxed by other states, mainly for certain oil/gas investment income.) |
| Maine | Yes – ordinary rates (5.8%–7.15%). Dividends taxed like other income. |
| Maryland | Yes – ordinary rates (2%–5.75% state, plus local up to ~3%). Dividends fully taxable. |
| Massachusetts | Yes – flat 5% income tax on most income, including dividends. (Note: Massachusetts taxes short-term capital gains at 12%, but that doesn’t affect dividends – all dividends fall under the 5% rate.) |
| Michigan | Yes – flat 4.25% income tax (state). Dividends taxed at 4.25%. (Cities like Detroit may have additional small income tax.) |
| Minnesota | Yes – ordinary rates (5.35%–9.85%). Dividends included in state taxable income. |
| Mississippi | Yes – ordinary rates (up to 5%). However, Mississippi has been phasing out its lower brackets; by 2024 the first $10k of income is untaxed, but above that dividends would be taxed at 5%. |
| Missouri | Yes – ordinary rates (1.5%–4.95%). Dividends taxed normally. Missouri allows an exclusion for some federal bond interest, but that doesn’t apply to corporate dividends. |
| Montana | Yes – ordinary rates (1%–6.75%). Dividends fully taxable at those rates. (Montana provides a partial exemption for capital gains, but not for dividends.) |
| Nebraska | Yes – ordinary rates (2.46%–6.64%). Dividends taxed as income. |
| Nevada | No – no state income tax in Nevada, so no tax on dividend income. |
| New Hampshire | Yes (temporarily) – New Hampshire has a unique 5% tax on dividends and interest (it does not tax wages). As of 2023, this tax rate is 4% and scheduled to phase out by 1% per year until eliminated by 2027. So NH residents currently pay 4% on dividend income (if over a certain threshold), but this will drop each year. |
| New Jersey | Yes – ordinary rates (1.4%–10.75%). Dividends taxed as normal income. (NJ doesn’t offer special capital gain rates either, so everything is at ordinary rates.) |
| New Mexico | Yes – ordinary rates (1.7%–5.9%). Dividends included. |
| New York | Yes – ordinary rates (4%–10.9% state, plus NYC local up to ~3.9%). Dividends fully taxable at applicable rates. (NY has no special dividend breaks). |
| North Carolina | Yes – flat 4.75% state income tax on all income, including dividends. |
| North Dakota | Yes – ordinary rates (1.1%–2.9%, very low progressive brackets). ND, however, allows a 40% long-term capital gains deduction on certain assets. That generally does not apply to dividends (only to actual capital gains from sales). So dividends taxed at the full rates listed. |
| Ohio | Yes – ordinary rates (0%–3.99% after recent cuts, first ~$26k is 0%). Dividends taxed as income above the threshold. (Ohio also has some local taxes in cities.) |
| Oklahoma | Yes – ordinary rates (0.25%–4.75%). Dividends taxed normally. |
| Oregon | Yes – ordinary rates (4.75%–9.9%). Dividends included fully. (Oregon has no sales tax, but its income tax is relatively high and inclusive of dividends.) |
| Pennsylvania | Yes – flat 3.07% tax on many classes of income, including dividends. PA taxes dividends at 3.07% (interest too), separate from wage withholding. (No special rate for qualified – just 3.07% for all.) |
| Rhode Island | Yes – ordinary rates (3.75%–5.99%). Dividends taxed as ordinary income. |
| South Carolina | Yes – ordinary rates (0%–6.5%, with first ~$3,200 exempt as of 2023). SC does allow a partial exclusion for long-term capital gains (44% of long-term gains excluded), but dividends do not qualify for that exclusion since they aren’t gains from your asset sales. So dividends taxed fully at the rates. |
| South Dakota | No – no state income tax, so dividend income is tax-free at state level. |
| Tennessee | No – as of 2021, no state tax on dividends. (Tennessee used to have the “Hall tax” of 6% on dividends/interest, but it was phased out completely by 2021. Now TN has no personal income tax at all.) |
| Texas | No – no state income tax, so no tax on dividends. |
| Utah | Yes – flat 4.85% state income tax, dividends included fully. (Utah offers a tax credit for certain capital gains reinvestment in Utah businesses, but that doesn’t apply to typical dividend income.) |
| Vermont | Yes – ordinary rates (3.35%–8.75%). Dividends taxed at ordinary rates. |
| Virginia | Yes – ordinary rates (2%–5.75%). Dividends included with other income. (VA allows an age deduction for seniors that can cover some investment income, but no specific dividend break otherwise.) |
| Washington | No state income tax. (However, note Washington State introduced a 7% tax on long-term capital gains over $250k as of 2022. That does not apply to dividends – only to realized capital gains from sales. So regular dividends remain untaxed by WA.) |
| West Virginia | Yes – ordinary rates (3%–6.5%). Dividends taxed normally. WV is phasing in rate cuts starting 2023, but no special dividend provisions. |
| Wisconsin | Yes – ordinary rates (3.54%–7.65%). WI interestingly allows a 30% exclusion for long-term capital gains (60% for farm assets) from income, but dividends are not eligible for that exclusion (unless they were from certain specific liquidation events perhaps). So dividends taxed fully at listed rates. |
| Wyoming | No – no state income tax, so no state tax on dividends. |
| District of Columbia | Yes – taxed as ordinary income (DC rates 4%–10.75% similar to high-state brackets). Dividends have no special rate in DC. |
(Above rates are as of mid-2020s; state tax laws can change, so always double-check current rates.)
Analysis: As you can see, the vast majority of states tax dividends just like any other income. The concept of “qualified dividends” with lower rates is purely a federal benefit. If you live in, say, California or New York, a dividend will just be lumped into your state taxable income and taxed at your normal state rate. Only in states with no income tax (Florida, Texas, etc.) or unique cases (NH’s soon-to-end tax) do you escape state tax on dividends altogether.
One more state nuance: if you itemize deductions on your federal return, state taxes you pay (including on dividends) could increase your federal SALT deduction (which is capped at $10k). But with the cap, many folks don’t get an extra benefit from paying state tax on dividends.
Practical tip: If you move from a high-tax state to a no-tax state, the year of the move, try to time recognizing extra dividend income when you’re a resident of the no-tax state, if possible (for instance, if you control some special dividend payouts or the timing of selling a fund that will distribute gains).
Now that federal and state taxation of 1099-DIV items is clear, let’s clarify some jargon in our Key Terms Glossary, then we’ll dive into real-life scenarios and common questions.
Glossary of Key Terms (Dividend Taxation Demystified)
Understanding 1099-DIV taxation means knowing a few technical terms and entities. Here’s a quick-reference glossary of key terms you’ll encounter:
Ordinary Dividend: A dividend that does not meet the criteria for “qualified.” Taxed at ordinary income rates. On 1099-DIV, Box 1a shows total ordinary dividends (including the qualified subset).
Qualified Dividend: A dividend from a U.S. company (or qualifying foreign company) that you held long enough to meet the IRS holding period. Qualified dividends are taxed at the lower capital gains tax rates. They are reported in Box 1b of 1099-DIV (subset of Box 1a).
Capital Gain Distribution: A distribution of profits from the sale of assets by a mutual fund or REIT, passed to shareholders. Taxed as long-term capital gain. Shown in Box 2a of 1099-DIV, with possible sub-classifications (2b, 2c, 2d) for special types of gains.
Section 199A Dividend: Also known as a Qualified REIT Dividend. A dividend from REITs or similar that qualifies for a 20% federal deduction under IRC §199A. Taxed as ordinary income (at full rate) but then eligible for the 20% deduction. Reported in Box 5 of 1099-DIV.
Nondividend Distribution: A distribution not paid from earnings, i.e., return of capital. Reported in Box 3. Not taxable when received, but reduces cost basis in the investment.
Exempt-Interest Dividend: A distribution from a mutual fund of municipal bond interest. Reported typically in Box 12. Not taxable federally (but may be taxable under AMT or by states if out-of-state bonds).
Foreign Tax Credit: A credit you can claim for taxes paid to foreign countries on dividends (from foreign stocks/funds). The foreign tax amount is reported in Box 7 of 1099-DIV. You claim the credit on Form 1116 (or directly if low amount).
REIT (Real Estate Investment Trust): A company that owns/finances real estate and must distribute most of its income to shareholders. REIT dividends often are not “qualified” and instead come through as ordinary income or Section 199A dividends (since REITs don’t pay corporate tax, the dividends don’t get qualified status typically).
Mutual Fund (or RIC): A regulated investment company that pools investors’ money to buy securities. Mutual funds pass income (dividends, interest) and capital gains to investors via distributions reported on 1099-DIV. Mutual funds can pay ordinary dividends (from dividends/interest they earn), capital gain distributions (from asset sales), and even exempt-interest dividends (if they invest in munis).
Earnings and Profits (E&P): A tax/accounting term roughly meaning a corporation’s accumulated and current profits. A distribution is considered a dividend (taxable) to the extent of a corporation’s E&P. Amounts beyond E&P are a return of capital. In other words, E&P is what lets the IRS determine if a payout is a true dividend or not. (If a company has no E&P, a distribution might be classified entirely as return of capital.)
IRS Form 1040 Line 3a/3b: Where you report dividend income on your individual tax return. Line 3b is the total ordinary dividends (taxable amount), and line 3a is the portion of those dividends that are qualified (for informational/calculation purposes).
Schedule B (Form 1040): An attachment to your tax return required if you have over $1,500 in interest or dividends, or certain foreign accounts. Schedule B lists the details of your dividend payers and amounts, and also asks about foreign bank accounts and trusts. Even if you don’t meet the threshold, you still report dividends on the 1040; you just may not need the separate schedule.
Backup Withholding: A 24% federal tax withholding that can be applied to payments like dividends if you failed to provide a correct taxpayer ID or are under certain IRS notifications. If backup withholding was taken from your dividends (Box 4 on 1099-DIV), you can claim it as tax paid on your return to get a refund or credit.
K-1 vs 1099-DIV: Not on the form itself, but important context – partnerships, S-Corporations, and certain trusts report income to owners on Schedule K-1 forms, not 1099-DIV. So if you own, say, an MLP (master limited partnership) directly, you’ll get a K-1, not a 1099-DIV, for those distributions. However, if you own an MLP through a mutual fund or ETF, that fund will report your share of income on a 1099-DIV or 1099-B as appropriate. Corporate stock and mutual funds -> 1099-DIV; partnerships/S-corps -> K-1.
Keep this glossary handy if you bump into an unfamiliar term. Next, let’s cement understanding with some real-world scenarios showing what is taxable on 1099-DIV and how to handle it.
Real-World Examples: How Different 1099-DIV Situations Are Taxed
To illustrate the principles, here are three scenarios with investors receiving various types of 1099-DIV entries. Each scenario includes a breakdown in a table of which items are taxable and how.
Scenario 1: Reinvested Stock Dividends (Qualified vs. Non-Qualified)
Investor A holds stock in two companies and a mutual fund. One stock is a blue-chip company paying qualified dividends, the other is a company that paid a special dividend not meeting holding requirements (so it’s ordinary), and the mutual fund distributed a long-term capital gain. All dividends were automatically reinvested.
Situation:
Blue Chip Corp: $500 dividend (qualified).
Startup Inc.: $100 dividend (not qualified, short holding period).
Equity Growth Fund: $300 capital gain distribution.
Even though they reinvested everything into more shares, all these amounts are taxable in the current year. Here’s the breakdown:
| Income Source | 1099-DIV Classification | Amount | Taxable? | Tax Treatment |
|---|---|---|---|---|
| Blue Chip Corp dividend | Ordinary Dividend (Box 1a); Qualified (Box 1b) | $500 | Yes | Taxed at long-term capital gains rates (qualified dividend at 0/15/20%). |
| Startup Inc. dividend | Ordinary Dividend (Box 1a); Not qualified | $100 | Yes | Taxed at ordinary income rates (treated as non-qualified dividend). |
| Equity Growth Fund distribution | Capital Gain Distribution (Box 2a) | $300 | Yes | Taxed as long-term capital gain (15% for most investors on such gains). |
| Total | – | $900 | Yes | Mix of tax rates: $500 at lower rate, $400 at ordinary rates (assuming $100 non-qual. + note: capital gains $300 at LTCG rate). |
Outcome: Investor A will report $900 of dividend income. The $500 qualified will get lower tax rates, the $100 ordinary at regular rates, and the $300 capital gain distribution as long-term capital gain. The fact they reinvested those amounts doesn’t change the tax – the IRS still taxes it as if they received cash. They should also ensure Schedule B is filed (since total dividends $900 + any interest likely over $1,500 threshold? Actually $900 is under $1,500, but if combined with other interest, etc. If just $900, no Schedule B needed solely from that).
Scenario 2: REIT Payout with Return of Capital (Section 199A Dividend)
Investor B owns shares in a Real Estate Investment Trust (REIT) which paid a large distribution. The 1099-DIV from the brokerage shows that part of the REIT’s distribution was a return of capital and part was a Section 199A dividend. Additionally, some of the REIT’s distribution was taxed as ordinary (non-qualified) dividend.
Situation:
REIT Fund total distribution: $1,000 per 1099-DIV breakdown:
$600 reported as Nondividend Distribution (Box 3) – return of capital.
$300 reported as Section 199A dividend (Box 5) – REIT ordinary dividend eligible for 20% deduction.
$100 reported as Ordinary dividends (Box 1a) – (this portion didn’t qualify as 199A or was in excess of something; basically taxed ordinary, not qualified either).
Here’s how this shakes out:
| Income Component | 1099-DIV Category | Amount | Taxable? | Tax Treatment |
|---|---|---|---|---|
| REIT distribution – Return of Capital portion | Nondividend Distribution (Box 3) | $600 | No (not in 2024) | Not taxable now; reduces Investor B’s cost basis in the REIT shares. |
| REIT distribution – Taxable portion | Section 199A Dividend (Box 5) | $300 | Yes | Taxed at ordinary income rates, but Investor B can take a 20% deduction (i.e., $60 deduction) under Section 199A. |
| REIT distribution – Additional ordinary dividend | Ordinary Dividend (Box 1a, non-qualified) | $100 | Yes | Taxed at ordinary income rates (no special rate or deduction). |
| Total distribution | – | $1,000 | $400 taxable | $400 is taxable income this year; $600 is deferred (basis reduction). |
Outcome: Investor B only pays tax on $400 of the $1,000 distribution this year. The $600 return of capital isn’t taxed now, but Investor B must subtract $600 from the cost basis of the REIT investment. If their basis was, say, $5,000, it’s now $4,400. When they sell the REIT shares in the future, that $600 will likely come back as part of a capital gain. The $300 Section 199A dividend is taxed now, but with a 20% deduction, and the $100 ordinary dividend is fully taxed now. This scenario shows how a distribution can be partially non-taxable and partially taxable.
Investor B should also keep records of that basis reduction. If the ROC ($600) had exceeded their basis, the excess would have been immediately taxable as capital gain. In this case, basis was sufficient.
Scenario 3: Foreign Stocks and a Municipal Bond Fund (Foreign Tax and Tax-Exempt Income)
Investor C has a diversified portfolio that includes an international stock fund and a municipal bond fund. The international fund paid dividends with foreign tax withheld, and the muni bond fund paid exempt-interest dividends.
Situation:
International Stock Fund: $200 in dividends, with $30 foreign tax paid (withheld by foreign governments).
Municipal Bond Fund: $150 in exempt-interest dividends (from various state munis).
Breakdown:
| Income Source | 1099-DIV Category | Amount | Taxable? | Tax Treatment / Notes |
|---|---|---|---|---|
| International Fund dividends | Ordinary Dividends (Box 1a); partially qualified (let’s assume $150 qualified of the $200) | $200 | Yes | $150 taxed at qualified dividend rates, $50 at ordinary rates. (Foreign company dividends can be qualified if from treaty country and fund held long enough.) |
| Foreign tax withheld on Intl Fund | Foreign Tax Paid (Box 7) | $30 | N/A | Not income. Investor C can claim a $30 foreign tax credit on their U.S. return, offsetting U.S. tax. (Or deduct $30 if not taking credit.) |
| Municipal Bond Fund interest dividends | Exempt-Interest Dividends (Box 12) | $150 | No | Not taxable federally. Investor C will report it for info, but it doesn’t add to federal taxable income. (State tax: their home state will tax the portion of this $150 that comes from out-of-state bonds – e.g., if $50 was from their home state’s bonds, that $50 is state-tax-free, $100 from other states is state-taxable.) |
| Totals | – | $350 total dividends; $30 foreign tax | $200 taxable (plus $50 at ordinary rates)** | $200 included in federal taxable income. $150 is tax-exempt. Also $30 credit offsets some U.S. tax on the $200. |
Outcome: Investor C will include $200 of dividend income on their federal return (the international fund’s $200). They won’t include the $150 muni interest in taxable income, though they’ll list it on the tax-exempt interest line. They also will claim a $30 foreign tax credit, which in effect ensures the $30 foreign tax they paid reduces their U.S. tax bill (so they aren’t double-taxed on that $200). On the state return, suppose Investor C lives in California – California will tax the $200 (no special rate) and also tax the portion of the $150 muni interest that was not from California bonds (most likely the majority, unless the fund is CA-specific). This scenario shows foreign tax and tax-exempt interest side by side.
These examples cover common scenarios: normal dividends, reinvestments (taxed anyway), return of capital, REIT special treatment, foreign tax credits, and muni fund interest.
Next, we’ll discuss briefly the legal underpinnings of dividend taxation and then outline some pros and cons of different dividend types from a tax perspective, followed by pitfalls to avoid.
Tax Law Deep Dive: Why Are Dividends Taxable? (Legal Perspectives)
From a tax law standpoint, dividends are considered income to the shareholder. The Internal Revenue Code (IRC) defines a “dividend” in Section 316 as a distribution of property made by a corporation to its shareholders out of earnings and profits (E&P). In simpler terms, if a company has profits, and it distributes them to owners, those distributions are dividends – and therefore taxable to the owners (unless specifically exempted).
A bit of historical context: The famous Supreme Court case Eisner v. Macomber (1920) addressed what counts as income. In that case, a shareholder received additional stock (a stock dividend) rather than cash. The Supreme Court ruled that a pro-rata stock dividend (where you just get more shares and your ownership percentage doesn’t change) was not taxable income under the 16th Amendment, because the shareholder hadn’t actually realized a gain – their proportionate stake in the company was the same, just cut into more pieces. This case established the principle that income must involve a gain or accession to wealth, clearly realized.
Why mention Macomber? It draws a line: cash dividends (or property dividends) do realize wealth to the shareholder (you got something separate from your original ownership), so they are taxable. But a pure stock dividend doesn’t give you new wealth (just more shares representing the same pie). Today, most dividends you get are cash (or additional shares that you could have taken in cash), so they’re taxable. Pure stock dividends are rare and generally not taxed unless you had the option of cash (in which case it’s taxed as if you took cash).
Additionally, tax law says if a corporation has no earnings and profits, a distribution isn’t a dividend – it’s a return of capital (until basis is exhausted). This ensures that companies can return invested capital to shareholders without immediate tax, and only genuine profits get taxed as dividends. The burden is on the corporation to classify it correctly when issuing the 1099-DIV. If the IRS audits the corporation and finds they had sufficient E&P, they could potentially reclassify what was reported as return of capital into taxable dividends.
In practice, publicly traded companies and funds carefully calculate E&P and work with tax advisors to correctly report distributions. Tax court cases occasionally arise if there’s a dispute – for example, shareholders might claim a distribution was a return of capital, but the IRS argues the company had earnings making it a dividend. If that happens, courts will look at the company’s financials and tax E&P calculations. By and large, for individual investors, you rely on the 1099-DIV classification. It’s rare to challenge it, and usually not advisable unless you have clear evidence of an error.
One more legal note: Dividends face what’s often called double taxation – the corporation pays tax on its profits, then you pay tax on the dividend from those already-taxed profits. Why do qualified dividends get a lower rate? Partly to alleviate this double tax burden on shareholders (especially after the 2003 tax act). REITs and mutual funds avoid double taxation differently: they generally don’t pay corporate tax if they distribute income (they’re pass-through entities for tax purposes), so their dividends (like REIT dividends) are not qualified for lower rates since no corporate tax was paid – instead, you pay ordinary tax (but REITs got the 199A deduction introduced in 2018 to give some relief).
In summary, the law clearly makes dividends taxable because they are considered income under the tax code, supported by definitions in the code and court rulings. Only specifically excluded categories (return of capital, etc.) escape tax by definition. Always assume any cash distribution from a corporation is taxable unless labeled otherwise.
Pros and Cons of Different Dividend Types (Tax Perspective)
Not all dividends are created equal when it comes to taxes. Here’s a quick pros and cons comparison of various types of distributions you might see on a 1099-DIV:
| Type of Distribution | Pros (Tax Advantages) | Cons (Tax Drawbacks) |
|---|---|---|
| Qualified Dividend | Lower federal tax rates (0%, 15%, 20%) – can save a lot for high earners. Counts toward preferential income that might be 0% if you’re in a low bracket. | Still taxable (adds to AGI). Requires meeting holding period and source criteria to qualify – otherwise taxed at higher rate. No special break on state taxes (taxed fully by state). |
| Non-Qualified Dividend | No special pros, really – just basic dividend. (One minor “pro”: no need to track holding period to qualify.) | Taxed at higher ordinary income rates (up to 37% federal). More tax cost for the same dollar of income compared to qualified. |
| Capital Gain Distribution | Taxed at long-term gain rates regardless of how long you held the fund. If you’re in a lower income range, could be 0% tax. | Adds to your taxable income. You have no control over timing (fund may distribute gains in a bad year). Also fully taxable by states at ordinary rates. Possibly subject to NIIT for high-income. |
| Section 199A (REIT) Dividend | 20% of the dividend is effectively tax-free (via deduction). REITs avoid corporate tax, so in a sense you’re taxed once (at your level) rather than twice. | Taxed at ordinary rate on the remaining 80%. Still usually higher tax than qualified dividends. State taxes don’t offer a 20% deduction – you pay state tax on full amount. |
| Nondividend Distribution (Return of Capital) | Not taxable when received. Lowers current tax bill; effectively defers tax until you sell. If never sell in your lifetime, that deferred gain may escape tax entirely at death (step-up in basis). | Reduces your cost basis – which can mean a bigger capital gain (and tax hit) later when you do sell. If distributions exceed basis, you’ll trigger taxable gain immediately. Also, no immediate benefit if you wanted income – it’s your own money back. |
| Exempt-Interest Dividend | Completely tax-free federally (and possibly tax-free at state level if from your state’s bonds). Doesn’t even count in your gross income for many tax calculations. | Could be taxable under AMT if from private activity bonds. Also, if you’re in a high-tax state and the bonds are out-of-state, you’ll owe state tax on that income. Yields on muni funds are often lower to begin with (so the trade-off for tax-free is lower interest). |
| Foreign Dividend with Tax Paid | You can claim a foreign tax credit, which often nullifies the double tax. Some foreign dividends qualify as “qualified” if from treaty countries. | If foreign tax is high and U.S. tax is high, paperwork can be complex (Form 1116). In some cases, foreign tax credit might not fully eliminate double taxation due to limits (especially if you have more foreign tax than U.S. tax on that income). |
Each type has different tax implications – savvy investors consider not just the yield but the after-tax yield. For example, a REIT might have a higher raw dividend yield, but after tax (ordinary rates, albeit 20% deduction), you keep less than a qualified dividend from a blue-chip stock with a slightly lower yield. Similarly, nondividend distributions might look attractive (no tax now), but they’re essentially giving you your money back – which might be fine if you want to defer tax, but not if you need income.
Tip: If you’re in a high bracket, you might favor qualified dividends and muni bond interest to minimize tax. If you’re in a low bracket (where qualified dividends are taxed 0%), you can really benefit from harvesting those. On the other hand, if you prioritize REITs for diversification, just be prepared for the tax by using tax-advantaged accounts or appreciating the 199A deduction.
Next up: now that we understand the pros/cons, let’s focus on common mistakes people make with Form 1099-DIV and how to avoid them.
Avoid These Common 1099-DIV Filing Mistakes
When filing your taxes with a 1099-DIV, it’s easy to slip up given all the categories. Here are some things to avoid and mistakes to watch out for:
🚫 Forgetting Reinvested Dividends: Just because your dividends were automatically reinvested in more shares doesn’t mean they’re tax-free. Avoid: Ignoring those amounts. Always report reinvested dividends as income for the year. (They increase your stock basis when reinvested, but they are still taxable now.)
🚫 Ignoring Small Dividends: Didn’t get a 1099-DIV because the dividend was under $10? You’re still legally required to report that income. Many people skip tiny dividends, figuring no form = no tax. Avoid: leaving it off. All dividend income is taxable, even if no form was issued. (The IRS threshold for issuing the form is $10, but the tax law threshold for reporting income is $0 – any amount is taxable.)
🚫 Double-Counting or Misreporting Box 1a/1b: Some taxpayers mistakenly add the qualified dividends (Box 1b) on top of total dividends (Box 1a) on the tax return – effectively double counting. Avoid: Do NOT add Box 1a and 1b together. Box 1b is a subset of 1a. Report the total once (line 3b of 1040), and the qualified portion separately (line 3a) as instructed. Also, don’t think you get to exclude Box 1b amount entirely – it’s taxable, just at a different rate.
🚫 Misclassifying Return of Capital: If you see a number in Box 3 (nondividend distribution), do not accidentally include it as dividend income. It’s not taxable. Conversely, track it for basis – some people forget to adjust their stock basis, which can cause incorrect gain/loss calculations when selling. Avoid: counting nondividend distributions as income, but do reduce your basis accordingly. Keep records!
🚫 Not Claiming the Foreign Tax Credit: If your 1099-DIV shows foreign tax paid, don’t overlook it. You’re entitled to a credit or deduction. Avoid: skipping Form 1116 (if needed) or the credit entry – otherwise you’re leaving money on the table. Without the credit, you effectively pay tax twice on that dividend. So claim that credit.
🚫 Missing the Section 199A Deduction: For those with REIT dividends (Box 5), the 1099-DIV is just reporting the amount – it’s on you (or your tax software) to take the 20% deduction on your return. Avoid: forgetting to apply the Qualified Business Income deduction for REIT dividends. If you just report it as ordinary income and don’t take the deduction, you’ll overpay. Use Form 8995 or 8995-A to calculate it if you qualify.
🚫 Assuming “Qualified” Means Untaxed: Some hear “qualified dividend” and think it might be like a qualified distribution (which in retirement accounts often means tax-free). Not so. Avoid: thinking qualified dividends aren’t taxable. They are taxable – just at a lower rate. Make sure you still include them in income.
🚫 Failing to Meet Holding Period (Qualified Dividend Pitfall): If you actively trade around ex-dividend dates, you might actually not qualify for the lower rate on some dividends. Brokers may not adjust for every scenario (especially if you had hedges or options). Avoid: claiming qualified status if you know you didn’t hold the stock the requisite 61 days. The IRS expects you to self-adjust in such cases. It’s an uncommon audit issue, but it’s the law.
🚫 Overlooking State Tax Differences: You carefully handled everything on your federal return, but then mistakenly thought qualified dividends get a break on the state return too, or forgot that your muni bond interest might be taxable in your state. Avoid: double-checking state treatment – include dividends fully unless your state has an exclusion. Also, if you have exempt-interest dividends from out-of-state munis, remember to add those for state taxable income if required.
🚫 Not Using Tax-Advantaged Accounts: This is more of a planning tip than a filing mistake – but failing to shelter heavily-taxed dividends (like REIT or high ordinary dividends) in retirement accounts can cost you. If you can, hold tax-inefficient assets in IRAs/401ks to avoid annual 1099-DIV issues altogether for those. This “mistake” is just an opportunity for future planning.
🚫 Procrastinating on Corrections: If you get a corrected 1099-DIV (common if a fund reclassifies part of a distribution from dividend to ROC or vice versa after year-end), don’t ignore it. Avoid: sticking with wrong numbers. File an amended return if the changes are significant. The IRS also gets that corrected form, and mismatches can trigger notices.
Being mindful of these pitfalls will help ensure you only pay the tax you owe – no more, no less – and avoid IRS headaches. Finally, to wrap up, let’s answer some frequently asked questions about what is taxable on a 1099-DIV:
FAQs: Common Questions About 1099-DIV Taxability
Q: Do I pay taxes on dividends if I reinvest them?
A: Yes. Reinvested dividends are still taxable income in the year they are paid to you (they’re treated as if you received cash, then bought new shares).
Q: Are qualified dividends tax-free?
A: No. Qualified dividends are taxable, but at lower long-term capital gains tax rates (0%, 15%, or 20% instead of ordinary rates).
Q: Can dividends be completely tax-free?
A: Yes, in certain cases. For example, municipal bond fund dividends are federally tax-free, and if your income is low, your qualified dividends might fall into a 0% tax bracket.
Q: Do I have to report dividends under $10?
A: Yes. All dividend income is reportable and taxable even if it’s below $10 (you might not receive a 1099-DIV, but the legal obligation to report is still there).
Q: Are return of capital distributions taxable?
A: No, not when received. A return of capital (nondividend distribution) isn’t taxable in the year you get it, unless it exceeds your investment basis (then the excess is taxable gain).
Q: Is foreign tax reported on 1099-DIV deductible or creditable?
A: Yes. Foreign tax paid is not income; you can claim it as a tax credit (typically best) or as an itemized deduction. This prevents double taxation of your foreign-source dividends.
Q: Do I pay state tax on dividends?
A: Yes, if your state has an income tax. Most states tax dividends as ordinary income (no special lower rate for qualified dividends at the state level).
Q: If I didn’t get a 1099-DIV, do I owe tax on dividends?
A: Yes. If you received dividends in a taxable account, you owe tax on them regardless of whether a 1099-DIV was issued (common if the total was small or in error).
Q: Are mutual fund capital gain distributions taxable if I didn’t sell anything?
A: Yes. Capital gain distributions reported on 1099-DIV are taxable to you even if you didn’t sell shares. The fund’s sales count as your long-term capital gains.