Do Qualified Dividends Affect AGI?

Your adjusted gross income, or AGI, determines your eligibility for several other deductions and credits. It includes all your taxable income minus your above-the-line deductions. Even though qualified dividends are eventually taxed at a different tax rate than your ordinary income, they're still counted as part of your adjusted gross income.

Qualified dividends are those paid by a U.S. corporation or a corporation from a country that has a tax treaty with the U.S. For the dividend to be "qualified," you must hold the stock for at least 61 days during the 60 days before and 60 days after the ex-dividend date. When counting your holding period, include the sale date but not the purchase date. Finally, the dividend can't be a payment that's specifically excluded from qualifying, such as a capital gains distribution.

Whether your dividends are qualified or ordinary has a big impact on your tax bill. Ordinary dividends are taxed at the same rate as your other income, which can be as high as 39.6 percent as of 2017. Qualified dividends, on the other hand, qualify for the lower long-term capital gains rates. In 2017, the highest rate was 20 percent, and that only applies if you're in the top tax bracket. If you're in the 15 percent bracket or lower, your qualified dividends are tax free. If you're in a higher bracket, but not the highest, you pay a 15 percent tax rate on your qualified dividends.

The situation is different for the tax years 2018 through 2025. Now, long-term capital gains and dividends have their own brackets and are no longer tied to the ordinary income brackets. The rates are still zero, 15 and 20 percent, however. The 15 percent rate starts at $38,601 and the 20 percent rate starting at $425,801 for a single taxpayer.

If you have qualified dividends for the year, you must use Internal Revenue Service Form 1040 to file your income taxes. Qualified dividends are actually reported twice on your tax return – once as part of your total dividends on line 9a and a second time when just the qualified dividends are reported on line 9b. They aren't doubled when figuring your AGI, though; the second listing on line 9b is just for figuring your tax bill with the lower tax rates.

If your investments are in tax-sheltered accounts, such as individual retirement accounts or 401(k)s, your qualified dividends aren't included in your AGI because the earnings aren't taxable until you take distributions. For example, if you receive $10,000 in qualified dividends in your IRA, that doesn't affect your taxable income for the year as long as you don't take a distribution. When you take distributions, however, they're treated as ordinary income, not qualified dividends, so you don't qualify for the lower long-term capital gains rates.