Topic no. 404, Dividends and other corporate distributions

Dividends

Dividends are distributions of earnings and profits paid by a corporation to stockholders. While most dividends are paid in cash, you may also be issued stock, stock rights, and other property or services. However, if you receive distributions such as additional stock or stock rights for services you performed, such distributions may not be paid from earnings and profits and may not qualify as dividends.

Regulated investment companies (RICs) such as mutual funds, exchange traded funds, money market funds, along with real estate investment trusts (REITs), also pay dividends to shareholders. These funds hold various stocks that generate dividend income, which is passed through to you as a shareholder. 

Qualified Dividends: Dividends can be classified either as ordinary or qualified. While all taxable dividends are considered ordinary income, qualified dividends are those ordinary dividends that qualify to be taxed at lower capital gain rates. The payer of the dividend is required to correctly identify which of your ordinary dividends are also qualified dividends when reporting them on your Form 1099-DIV, Dividends and Distributions.

Capital gain distributions

In addition to dividends, RICs and REITs may also pay capital gain distributions. Capital gain distributions are always reported as long-term capital gains. They are reported to you on Form 1099-DIV.

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, Notice to Shareholder of Undistributed Long-Term Capital Gains. 

Reporting

For information on how to report your dividends and capital gain distributions, refer to the Instructions for Form 1040 (and Form 1040-SR). 

TIP: If you have entries in any box on the Form 1099-DIV, the “Instructions for Recipient” on the back can explain the boxes and reporting information.

Return of capital (nondividend and liquidating distributions)

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, which 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 and your adjusted cost basis is greater than zero. If the corporation ceases to exist (or liquidates), distributing its assets to shareholders, and the total liquidating distributions you receive are less than the basis of the stock, you may have a capital loss, but only after you have received the final distribution that results in redemption or cancellation of the stock. For nondividend distributions, once the adjusted cost basis of your stock has been reduced to zero, any further nondividend distribution is a taxable capital gain. Report taxable gains and/or losses on Form 8949, Sales and Other Dispositions of Capital Assets and Schedule D (Form 1040), Capital Gains and Losses.

Form 1099-DIV

You should receive a Form 1099-DIV from each payer for distributions of at least $10. Form 1099-DIV should break down the distribution into the various categories. If it doesn't, contact the payer. Keep this form with your records. Only attach it to your tax return if federal income tax was withheld.  

Note: Even if you do not receive a Form 1099-DIV, you must still report all taxable dividend income. For instance, there may be distributive shares of dividends from partnerships, estates, or S corporations. Your share of the entity's dividends is generally reported to you on a Schedule K-1. Keep this form with your records and do not attach to your tax return.

Additional considerations

Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U.S. building and loan associations, U.S. savings and loan associations, federal savings and loan associations, and similar financial institutions are actually interest. Report these amounts as interest income.  For more information on interest, refer to Topic no. 403.

It is common for brokerage firms to provide a consolidated 1099 statement that includes a summary of activity along with multiple 1099 forms in one document.

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 Schedule B (Form 1040), Interest and Ordinary Dividends.

If you receive dividends in significant amounts, you may be subject to the net investment income tax (NIIT) and may have to pay estimated tax to avoid a penalty. For more information, see Topic 559, Net investment income tax, Estimated taxes or Am I required to make estimated tax payments?

Additional information

You may find more information on dividend income in Publication 550, Investment Income and Expenses.