And every investor who benefits from the lower capital gains and dividend tax rates will have to pay for their tax savings by running extra computations to figure out their precise IRS bill.
Smaller earnings mean less tax filing
First, take a look at investors who have the easiest reporting route.
If your dividend and interest income is less than $1,500 in each category, you don't have to file Schedule B with your Form 1040 or Form 1040A. You simply list your interest and dividend income directly on line 8a of your 1040 or 1040A.
And don't forget to report tax-exempt interest. It won't be counted in your eventual tax calculations, but the IRS wants to know about it anyway, on line 8b of the 1040 and 1040A.
The $1,500 threshold also applies to interest income earned by Form 1040EZ filers. Previously, when the interest earnings limit was substantially smaller, taxpayers who otherwise qualified to use the simple EZ return were forced to file one of the more complex individual returns.
But now, as long as an individual meets the 1040EZ's other requirements (e.g., taxable income, filing status), that taxpayer can earn up to $1,500 in interest and still use this one-page return.
The EZ remains off limits, however, for individuals who earn dividend income. They'll have to move up to the 1040A.
2 types of dividends, 2 lines to complete
Taxpayers who are able to report dividend payments directly on their 1040 or 1040A returns also need to note that there are two lines for these earnings.
On each of these forms, ordinary dividends go on line 9a. Just below is 9b, where you'll enter any qualified dividends that are eligible for the lower tax rates. For most taxpayers, these qualified amounts on 2013 tax returns are taxed at 15 percent or 20 percent, depending on your adjusted gross income, rather than regular income tax rates that go as high as 39.6 percent.
The year-end tax statement for each dividend-paying investment will detail how much of your earnings to enter on line 9a and 9b.
Count interest and dividends separately
Taxpayers also must evaluate their earnings in interest and dividend categories separately to see if they can be free of some forms. The new limit is applied independently to each type of income.
So, if you received $500 in interest from a certificate of deposit and your stocks paid $1,200 in dividends, you don't have to file Schedule B even though your investment income total is $1,700. But if either category alone exceeds $1,500, you must report the amount on the appropriate schedule and send it with your return to the IRS.