|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
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
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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