Lower tax with Qualified Dividends and Capital Gain Worksheet


Today I was about to mail out my state tax return and saw a blank space in my schedule D line 22. It asked if I had any qualified dividend, which we did have. I was surprised Taxcut didn’t fill in this blank for me. So I decided to follow the instruction and take a look at the worksheet myself.

Dividends are usually taxed at the marginal tax rate of your ordinary income. However, take a look at the form 1099-DIV and you may find some of them are qualified dividends, which are taxed at the tax rate of long-term capital gain (15%).

Now the good news is that some people may qualify for an even lower tax rate at 5%. Please take a look at the following to see if you qualify:
1. If you have qualified dividends or long-term capital gains;
AND
2. If your adjusted gross income (AGI) is
less than $30,650 if single or married filing separately;
or less than$61,300 if married filing jointly or qualifying widow(er);
or less than $41,050 if head of household
Then you could lower your tax with the Qualified Dividends and Capital Gain Worksheet (Page 38 of 1040 instructions for 2006 and Page 35 of 1040 instructions for 2007) on line 44 of Federal tax form 1040.

I believe many graduate students and young fellows with lower income qualify for this. I used to be quite skeptical about usefulness of all kinds of the worksheets in 1040. This time, it really saved us hundreds of dollars in tax!

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17 Responses to “Lower tax with Qualified Dividends and Capital Gain Worksheet”

  1. mOOm Says:

    This is one reason why I don’t use tax software… the main one is I don’t think it will know what to do with my Australian Investments and I’ll have to do that by hand anyway.

  2. Yannick Says:

    Yes, I was too optimistic about myself and the software and almost missed those $400. It turned out that we didn’t qualify for the lower rate before taking the $5000 exemption. I guess that was the reason that the software did not get me into the worksheet.

    On the other hand, the software did generate a nice Schedule D extension worksheet automatically and classified long term and short term capital gains properly. However, it seems that the convenience sometimes can be costly because of our specific situations. I will still use it, however, will check all the blanks more carefully next year!

  3. Arthur Says:

    Where do you find the worksheet for this? I can’t seem to find it!

  4. latestarters Says:

    Arthur, Sorry for the confusion. My post was written in last April, therefore, page 38 was for year 2006. For 2007, the worksheet has been moved to page 35. Please see my updated link above. Good luck! — Yannick

  5. C. Lin Says:

    One question about the instruction for Line 12 “No” option.
    I think it should be “the smaller of line 1 or line 7” instead of
    “the smaller of line 1 or line 6”.

    Following the instruction, I end up having to pay virtually nothing, comparing with not using this worksheet.

  6. Gerrard Says:

    Help!
    If I get to line 44 on 1040 and use “Qualified Dividend Worksheet” to compute AGI tax, do I add the worksheet tax result to the Taxable income tax (from the table) on line 43?…or just use the worksheet computed tax for line 44?

  7. latestarters Says:

    Hi Lin and Gerrard:

    Sorry for my late response. I hope you’ve either sent out your tax return or filed an extension. Here are my answers:

    C. Lin, I think the instruction is correct about “the smaller of line 1 or line 6″. Line 7 should always be smaller or equal to Line 1. It’s great that you saved a lot using it!

    Gerrard, it think it’s the latter. Just use the worksheet to compute total tax for line 44.

    Good Luck!

  8. Forrest Says:

    Hey latestarters-

    Guess what? You were right about young, college students with low incomes! That’s me.

    I sent in my taxes this year fairly excited (as you were) about what appears to be this “5% tax rate deal”, but I have had letters returning my tax return with errors twice now. They are usually listing small mistakes I made (ex: I did not write my qualified dividends into the ordinary dividends line… because I thought they were entirely separate entities, instead of qual’s being the PORTION that are qualified.) but the big problem is they always stick me back into the regular tax bracket! They don’t recognize this 5% tax… but when I go through my Qualified dividends and capital gains tax worksheet I find the much lower number to be consistent with Worksheet! What should I do?

    Thanks,
    Forrest

  9. latestarters Says:

    Hey Forrest,

    Welcome to the board. This is a bit strange, as my experience with IRS so far has been good. They actually picked up a deduction I missed and refunded me more money in one year. I guess they don’t trust students’ tax return though we don’t earn much.

    Yes, you are right that ordinary dividends should include qualified dividends. You may be unlucky to get an auditor not thorough enough to redo the worksheet after correcting the error. My suggestion is to file a clean 1040X with all mistakes corrected to allow the IRS auditor to focus on the qualified dividends and capital gains tax worksheet. Don’t get frustrated. You can always file 1040X to correct any errors as long as it’s within three years.

    BTW, congratulations on starting saving and investing early! I started only after being in graduate school for 5 years.

    Best of Luck!

  10. SpecialK Says:

    I just did my capital gains worksheet for $107 in qualified dividends by hand/spreadsheet.

    Filing single, I’m over the $31k AGI tax rate, so I expected to cut the tax by 10% from 25% or about $10. Unfortunately the dividends worksheet just tells you to subtract the gains from your final tax value and to do a new lookup on the tax tables, then add 15% of the dividend to the lookup value. $10 became just over $7. Not worth my time, but probably worth the exercise and finding out how to do this and verify any future tax software actually works.

  11. latestarters Says:

    Hi SpecialK,

    Thanks for sharing your experience. I’m sorry to hear that the tax table lookup eats up $3 savings. However, as you said, the experience and knowledge gained through this exercise are much more valuable than $7.

    This year, I finally switched to TurboTax because I no longer had complicated international tax issues and I had far too many investment transactions. As you said, my past experience helped me verify that it worked as expected.

    Best wishes,

    Yannick

  12. Tax Guru Says:

    I’ve been active in taxes for longer then I care to admit, both on the individual side (all my employed life-time!!) and from a legal viewpoint since passing the bar and pursuing tax law. I’ve offered a lot of advice and rectified a lot of wrongs, and I must say that what you’ve posted makes perfect sense. Please continue the good work – the more people know the better they’ll be outfitted to comprehend with the tax man, and that’s what it’s all about.

  13. diogsoffisk Says:

    It looks like you are a true specialist. Did you study about the theme? hehe

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