Topic Number 404 - Dividends
Dividends are distributions of property a corporation may pay you if you own stock in that corporation. Corporations pay most dividends in cash. However, they may also pay them as stock of another corporation or as any other property. You also may receive distributions through your interest in a partnership, an estate, a trust, a subchapter S corporation, or from an association that's taxable as a corporation. 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. Additionally, a shareholder that provides services to a corporation may be deemed to receive a dividend if the corporation pays the shareholder service-provider in excess of what it would pay a third party for the same services. 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 at least $10. If you're a partner in a partnership or a beneficiary of an estate or trust, you may be required to report your share of any dividends received by the entity, whether or not the dividend is paid out to you. Your share of the entity's dividends is generally reported to you on a Schedule K-1.
Dividends are the most common type of distribution from a corporation. They're paid out of the earnings and profits of the corporation. Dividends can be classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates. The payer of the dividend is required to correctly identify each type and amount of dividend for you when reporting them on your Form 1099-DIV for tax purposes. For a definition of qualified dividends, refer to Publication 550, Investment Income and Expenses.
Return of Capital
Distributions that qualify as a return of capital aren't 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 adjusted cost basis of your stock. For information on basis of assets, refer to Topic No. 703. A distribution generally qualifies as a return of capital if the corporation making the distribution doesn't have any accumulated or current year earnings and profits. Once the adjusted cost basis of your stock has been reduced to zero, any further nondividend distribution is a taxable capital gain that you report on Form 8949.pdf, Sales and Other Dispositions of Capital Assets, and Form 1040, Schedule D.pdf, Capital Gains and Losses.
Capital Gain Distributions
Regulated investment companies (RICs) (mutual funds, exchange traded funds, money market funds, etc.) and real estate investment trusts (REITs) may pay capital gain distributions. Capital gain distributions are always reported as long-term capital gains. You must also report any undistributed capital gain that RICs or REITs have designated to you in a written notice. They report these undistributed capital gains to you on Form 2439.pdf, Notice to Shareholder of Undistributed Long-Term Capital Gains. For information on how to report qualifying dividends and capital gain distributions, refer to the Form 1040 Instructions.
Form 1099-DIV should break down the distribution into the various categories. If it doesn't, contact the payer.
You must give your correct social security number to the payer of your dividend income. If you don't, you may be subject to a penalty and/or backup withholding. For more information on backup withholding, refer to Topic No. 307.
If you receive over $1,500 of taxable ordinary dividends, you must report these dividends on Form 1040, Schedule B.pdf, Interest and Ordinary Dividends.
You may find more information on dividend income in Publication 550, Investment Income and Expenses.