Jeffrey Wade
If you receive dividends from an insurance company, you must report them on your tax return. Generally, life insurance proceeds received as a beneficiary due to the death of the insured person are not considered gross income and do not need to be reported. However, any interest received is taxable and must be reported as interest income. For the 2024 tax year, interest and dividend income must be reported on Form 1040. Ordinary dividends are reported on line 3b, while qualified dividends are reported on line 3a. If your ordinary dividends exceed $1,500, you must also complete Schedule B (Form 1040).
| Characteristics | Values |
|---|---|
| Who should report | Federal employees and retirees |
| Type of income | Interest and dividend income |
| Type of account | Non-retirement accounts |
| Form | 1040 |
| Line | 3b for ordinary dividends and Line 3a for qualified dividends |
| Amount | If the total amount of ordinary dividends is greater than $1,500, Schedule B of Form 1040 must be attached |
| Other forms | Form 1099-DIV and Form 1040-NR |
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What You'll Learn
Interest and dividend income
If you received more than $1,500 in interest or dividend income last year, you may need to file a Schedule B tax form in addition to Form 1040. Schedule B reports the interest and dividend income you received during the tax year. Most taxpayers only need to file a Schedule B if their interest and dividend income reaches this taxable threshold.
Dividends from credit unions are reported as interest income on line 2b of Form 1040. Dividends on certain life insurance casualty insurance policies that are paid out by the insurance company to the policyholder are considered a "return of premium" and are not taxable income unless the dividends exceed the policyholder's total premium payments. However, any interest paid on accumulated dividends is taxable as interest income.
Qualified dividends, which are taxed at a lower rate than ordinary dividends, are reported on Form 1099-DIV and entered on line 3a of Form 1040. If the total amount of ordinary dividends exceeds $1,500, then Schedule B must be attached to Form 1040.
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Ordinary dividends
Most dividends from a corporation or mutual fund are ordinary dividends. They are paid periodically by corporations to shareholders of record. They are a share of a company's profits. Unless a dividend payment is classified as a qualified dividend payment, it is taxed as ordinary income.
For federal employees and retirees who received ordinary dividends in their brokerage (non-retirement) accounts in 2022, these must be reported on IRS Form 1040, line 3b. If the total amount of ordinary dividends is greater than $1,500 during 2022, then Schedule B of Form 1040 must be attached to Form 1040.
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Qualified dividends
For example, if XYZ stock declares a dividend payment on November 20 and sets the record date for one month later, with an ex-dividend date of December 19, those who bought the stock before this date and held it for at least 61 days in the 121-day period that started 60 days before December 19 will pay the capital gains tax rate on the dividend.
To report qualified dividends on Form 1040, enter the amounts from Box 1b of Form 1099-DIV on line 3a. If you had over $1,500 of ordinary dividends or received ordinary dividends in your name that actually belong to someone else, you must also file Schedule B (Form 1040).
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Capital gains distributions
A capital gains distribution is the investor's share of the proceeds of a fund's sale of stocks and other assets. Mutual funds are required by law to make regular capital gains distributions to their shareholders. Fund managers buy and sell stocks, and if a fund holds a stock for more than a year and then sells it, the profit made is usually paid out to the investor. This profit paid out is a capital gain distribution.
Owners of mutual fund shares have the option to take the capital gains distribution as immediate payments or reinvest it in additional fund shares. Capital gains distributions are taxed at a lower rate than ordinary income and are treated as long-term gains, regardless of how long the investor owned shares in the mutual fund. The tax rate depends on the investor's income and how long the original asset was held.
It is important to note that capital gains distributions from mutual fund or ETF holdings are treated as long-term capital gains by the IRS, regardless of how long the individual has owned shares of the fund. These distributions are taxed as such, unless the fund is part of a tax-deferred retirement account.
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Life insurance proceeds
There are some exceptions to this rule. If the life insurance policy was transferred to you in exchange for cash or other valuable consideration, the exclusion for the proceeds is limited. In this case, the exclusion amount is the sum of the consideration paid, any additional premiums paid, and certain other amounts. Additionally, if the beneficiary is an estate rather than an individual, the person inheriting the estate may need to pay estate taxes.
To avoid federal taxation on life insurance proceeds, you can transfer ownership of the policy to another person or entity. This involves choosing a competent adult or entity as the new owner, which can be the policy beneficiary, and completing the necessary assignment or transfer of ownership forms with your insurance company. However, it is important to note that this transfer of ownership is irrevocable, and you will give up all rights to make changes to the policy in the future.
In certain situations, the beneficiary of a life insurance policy may be taxed on the proceeds. If the policyholder delays the benefit payout and the insurance company holds the money for a period of time, the beneficiary may be taxed on the interest generated. Additionally, if the payout is structured in installments rather than a lump sum, the insurance company typically pays interest on the unpaid amount, which is taxable as income.
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Frequently asked questions
Report insurance dividends on Form 1040, Line 3b for ordinary dividends and Line 3a for qualified dividends.
Ordinary dividends are reported in Box 1a of Form 1099-DIV. If they exceed $1,500, they must be reported on Schedule B.
Qualified dividends are taxed at a reduced rate and are reported in Box 1b of Form 1099-DIV. They are entered on Line 3a of Form 1040.
If you do not receive a Form 1099-DIV, report the distribution as an ordinary dividend on Line 3b of Form 1040.
