Discover the True Value: Understanding Gross Dividends
Similar in concept to gross income, gross dividends are the sum total of all dividends received by an investor for tax purposes. Gross dividends include all ordinary dividends that are paid, plus capital-gains distributions and nontaxable distributions received by the taxpayer during the year before taxes, fees, and expenses are deducted.
Gross dividends can be contrasted with net dividends.
Key Takeaways
- Gross dividends, for tax purposes, include all ordinary dividends plus capital gains distributions and non-taxable distributions.
- Gross dividends will be adjusted for the presence of qualified dividends as well as any associated fees and expenses of receiving dividends.
- Taxpayers use IRS form 1099-DIV to calculate their taxable exposure to dividend and related investment income.
A Clearer Perspective on Gross Dividends
Most of the time, gross dividends paid to American investors are reported on IRS Form 1099-DIV. Ordinary dividends are reported in Box 1a, while the other types of dividend income are listed elsewhere. All dividends are considered ordinary unless they are specifically classified as qualified dividends. Box 1b is designated for reporting qualified dividends, which shows the portion of the amount in Box 1a that may be eligible for reduced capital gains rates. Box 3 shows non-dividend distributions.
A 1099-DIV is required to be sent to anyone who has received dividends (including capital gain dividends and exempt-interest dividends) and other distributions on stock of ten dollars or more, or if funds were withheld to pay foreign tax on dividends and other distributions on stock over a given year. Not all dividend income reported on the 1099-DIV is reported on Schedule B.
In many countries, income from dividends is treated at a more favorable tax rate than ordinary income. Investors may look to dividend-paying stocks in order to take advantage of potentially more favorable tax conditions. The amount of tax owed on dividends depends on overall income and whether the dividends are qualified or nonqualified.
An Inspiring Example of a Gross Dividend Versus a Net Dividend
As an example, let’s say that company XYZCorp decides to issue a dividend of $1.20 to its shareholders. This means for each share owned, the company pays $1.20 in dividends. If a shareholder owns 1,000 shares, they would receive an annual payout of $1,200 in gross dividends. Companies in the U.S. typically pay quarterly dividends, while non-U.S. companies generally pay annual or semi-annual dividends.
If the dividend was considered an ordinary one and taxed at a rate of 35%, with another 2% going toward fees and expenses, the net dividend would actually be $756. If the dividend was a qualified one instead, with a reduced tax rate of 15%, the net dividend would actually be $996.
In summary, understanding the differences between gross and net dividends is crucial for investors to accurately assess their income and tax obligations from investments. This knowledge helps in making informed decisions that can maximize returns and minimize tax liabilities.
Related Terms: Ordinary Dividends, Qualified Dividends, Non-taxable Distributions, Capital Gains Distributions, IRS Form 1099-DIV.
References
- Internal Revenue Service. “About Form 1099-DIV, Dividends and Distributions”.
- Internal Revenue Service. “2021 Form 1099-DIV”, Page 3.
- Internal Revenue Service. “Instructions for Form 1099-DIV”, Page 1.
- Internal Revenue Service. “1099 DIV Dividend Income”.
