When you have ordinary dividends and qualified dividends (line 3a and 3b on 1040) Are those amounts two separate incomes that should be counted together?

[CalCountry · Accepted solution]

Question and answer updated for 2018 : Former dividend lines 9a and 9b are now lines 3a and 3b.

No, they are not added together.  Your qualified dividends are subset of your total ordinary dividends.  Line 3b is your taxable amount.  Line 3a is merely reporting the qualified dividends portion of line 3b.

Line 3a is broken out because qualified dividends receive favorable tax treatment equivalent to that on long term capital gains.  See your "Qualified Dividends and Capital Gain Worksheet" for how they affect your tax obligation.

[spm_no]

I'd like to thank Intuit for it's clear and concise reply.  The IRS form 1040 line 3b is titled "Ordinary Dividends" which gives the false impression that it excludes the qualified dividends on line 3a.  As you noted, line 3b is actually the total taxable dividends which includes the qualified dividends on line 3a.  If the IRS would simply re-title line 3b to "Total Taxable Dividends" then it would eliminate a lot of unnecessary confusion.

[macuser_22]

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@spm_no wrote:

I'd like to thank Intuit for it's clear and concise reply.  The IRS form 1040 line 3b is titled "Ordinary Dividends" which gives the false impression that it excludes the qualified dividends on line 3a.  As you noted, line 3b is actually the total taxable dividends which includes the qualified dividends on line 3a.  If the IRS would simply re-title line 3b to "Total Taxable Dividends" then it would eliminate a lot of unnecessary confusion.

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You seem to think that qualified dividends are not also ordinary dividends. 

All dividends on the 1099-DIV lines 1a are "ordinary dividends".  A *portion* of those ordinary dividends might also be qualified dividends that qualify for special tax treatment.

The 1040 instructions say:

Line 3b
Ordinary Dividends
Each payer should send you a Form
1099-DIV. Enter your total ordinary dividends
on line 3b. This amount should
be shown in box 1a of Form(s)
1099-DIV.

Line 3a
Qualified Dividends
Enter your total qualified dividends on
line 3a. Qualified dividends also are included
in the ordinary dividend total required
to be shown on line 3b. Qualified

dividends are eligible for a lower tax
rate than other ordinary income. Generally,
these dividends are shown in
box 1b of Form(s) 1099-DIV. See Pub.
550 for the definition of qualified dividends
if you received dividends not reported
on Form 1099-DIV.

The IRS 1099-DIV instructions say:

Box 1b. Qualified Dividends
Enter the portion of the dividends in box 1a that qualify for the
reduced capital gains rates.

[spm_no]

Thanks for your reply.  The quote below is from the IRS (https://www.irs.gov/taxtopics/tc404) and is what caused my initial confusion.  It says that ordinary dividends are taxed as ordinary income.  If so, why would ordinary dividends include qualified dividends which are not taxed as ordinary income?  It seems like a contradiction.

"Dividends can be classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates. "

[dmertz]

Unfortunately, Tax Topic 404 is inaccurate.  If you go to the reference provided in Tax Topic 404,  https://www.irs.gov/pub/irs-pdf/p550.pdf, you'll find that it says, "Qualified dividends are the ordinary dividends subject to the same 0%, 15%, or 20% maximum tax rate that applies to net capital gain."  In other words, qualified dividends are a subset of ordinary dividends.

[macuser_22]

To be correct, tax topic 404 probably should read:

"Whereas ordinary dividends, that are not qualified,  are taxable as ordinary income.  Qualified dividends that meet certain requirements are taxed at lower capital gain rates..."

However, tax topics are more like a FAQ and are not official IRS publications, and tax topics are often incomplete.  Tax topics should not be relied on the same way as form instructions or publications.

[spm_no]

Yes, I agree with you.  The point I was trying to make is that almost all web pages get this wrong, i.e. they view ordinary dividends and qualified dividends as two separate things (each having their own tax rates), rather than qualified dividends being a subset of ordinary dividends.  See for example Investopedia (https://www.investopedia.com/terms/o/ordinary-dividends.asp)  which says:

"The main differences between ordinary dividends and qualified dividends are the rates at which the gains are taxed. "

My initial comment was to acknowledge that Intuit actually gave the correct answer unlike most other web pages.

[taxchamp]

I think the crux of the issue is that when the taxpayer inputs total ordinary dividends  (or has it downloaded from external source) and that total is shown on 1040 line 3b and that taxpayer also has some "qualified dividends" in 3a, the taxpayer wonders, "how am I getting a lower tax rate on the qualified dividends since the total ordinary dividends flows down to line 15, Taxable Income.

If someone from Turbo Tax can explain this, it sure would help many.

[macuser_22]

The amount of qualified dividends on line 3a on the 2020 1040 is used to calculate the tax on line 16 using the "Qualified Dividend and Capital Gains Worksheet".

"Taxable Income" and "Tax" are not the same thing.

You can print all forms and worksheets to see the calculations.

[taxchamp]

Many thanks for that very helpful advice.  I reviewed the worksheets and it makes sense.  Thanks !!!!!

[mister-broshar]

I agree. Most of the information that I find about ordinary vs qualified dividends implies the values are not overlapping. They say the values are separate which is true (1a vs 1b), but apparently one value contains the other. So saying they are separate is misleading although not incorrect. I did find a nice explanation from AARP: 

Qualified dividends are taxed at the same tax rate that applies to net long-term capital gains, while non-qualified dividends are taxed at ordinary income rates. I like the term 'non-qualified'.

I think people may be confused by the use of 'ordinary' for both income and dividend. One might expect ordinary dividends to be taxed as ordinary income. But only non-qualified ordinary dividends are taxed as ordinary income. I think for dividend 'ordinary' means regularly scheduled -- not that it's taxed as ordinary income .. whatever that is 🙂

[fanfare]

If you are not happy with the labeling of 1040 line 3,

communicate your insights to the IRS here:

https://www.irs.gov/forms-pubs/comment-on-tax-forms-and-publications

[mister-broshar]

@fanfare : Thanks for the reply.

I think the wording in the 1040 instructions is clear. IRS instructions may be correct and may be definitive, but they are hard to understand and hard to find the answer to a particular question. I google for information and read sources from TT, investopia and such. I found several sources that indicate qualified is not a subset of ordinary dividend or at least imply that. I agree with other posts here that this issue seems to be misunderstood by more than just a few lay people.

I did submit a request to fix the Topic No. 404 Dividends publication. Another post says it's OK for this be wrong since it's not an instructions document, but that does not seem like a reasonable excuse to me.

I can't fix or even suggest to fix all the wrong or misleading sources out there. But, I'm glad that I understand now and I hope others come here for clarification. This TT community is very good!

Also, I'm coming to this issue while filling out 1041; not 1040. I scanned the 1041 instructions and don't see indication that qualified is a subset of ordinary.  ... so the answer is in an IRS instructions document, but how is one to know where to look for it? As I often say: it's good to document information, but if you can't find the information when you need it then it's not valuable.

[spm_no]

@fanfare Thank you for the link to provide feedback to the IRS.  I have given the following feedback to the IRS:

The second paragraph under the header "Form 1099-DIV" in tax topic "Topic No. 404 Dividends" is misleading since it implies that all ordinary dividends are taxed as ordinary income. I recommend that the second paragraph under the header "Form 1099-DIV" be changed to "Dividends are the most common type of distribution from a corporation. They're paid out of the earnings and profits of the corporation. A portion of the ordinary dividends that meet certain requirements are called qualified dividends and are taxed at capital gain rates. Dividends not classified as qualified are taxed as ordinary income."