Tax Preparation Help  
Tax Topic #404 2008 Tax Year

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 payor 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. However, 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 payor.

You must give your correct social security number to the payor of your dividend income. If you do not, you may be subject to a penalty and to 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.

Page Last Reviewed or Updated: December 22, 2008

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