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Dividend
Tax Issues
Here's what the IRS has to say
about dividends (from IRS.gov).
Topic 404 - Dividends
Dividends are distributions of property (which can include money, stock
of another corporation or other property) a corporation pays you because
you own stock in that corporation. You also may receive dividends
through a partnership, an estate, a trust, a subchapter S corporation or
from an association that is taxable as a corporation. Most dividends are
paid in cash. A shareholder of a corporation may be deemed to receive a
dividend if the corporation pays the debt of its shareholder, the
shareholder receives services from the corporation, or the shareholder
is allowed the use of the corporation's property. A shareholder may also
receive distributions such as additional stock or stock rights in the
distributing corporation; such distributions may or may not qualify as
dividends.
You
should receive a
Form 1099-DIV (PDF),
Dividends and Distributions, from each payer for distributions
of $10.00 or more. Also, if you receive dividends through a partnership,
an estate, a trust, or a subchapter S corporation, you should receive a
Schedule K-1 from that entity indicating the amount of dividends taxable
to you. You must report all taxable dividends even if you do not receive
a Form 1099–DIV or Schedule K-1.
Ordinary dividends are the most common type of distribution from a
corporation. They are paid out of the earnings and profits of the
corporation. Ordinary dividends are taxable as ordinary income unless
they are qualified dividends. Qualified dividends are ordinary dividends
that meet the requirements to be taxed as net capital gains.
Distributions that qualify as a return of capital are not dividends. A
return of capital is a return of some or all of your investment in the
stock of the company. A return of capital reduces the basis of your
stock. For information on
Basis
of Assets, refer to
Topic 703. A
distribution generally qualifies as a return of capital if the
corporation making the distribution does not have any accumulated or
current year earnings and profits. Once the basis of your stock has been
reduced to zero, any further non-dividend distribution is capital gain.
Capital gain distributions may be paid by regulated investment companies
(mutual funds) and real estate investment trusts (REITs). Capital gain
distributions are always reported as long-term capital gains. You must
also report any undistributed capital gain that mutual funds or REITs
have designated to you in a written notice. Those undistributed capital
gains are reported to you on
Form 2439 (PDF).
Please refer to the
Form 1040 Instructions or
Form 1040A
Instructions for information on how to report qualifying dividends
and capital gain distributions.
Form
1099-DIV should break down the distribution into the various categories.
If it does not, contact the payer.
You
must give your correct social security number to the payer of your
dividend income. If you do not, you may be subject to a penalty and/or
back-up withholding. Refer to
Topic 307 for more
information on back-up withholding.
If
you receive dividends in significant amounts, you may have to pay
estimated tax.
Additional information on dividend income can be found in
Publication
550,
Investment Income and Expenses, and
Publication
564,
Mutual Fund Distributions.
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