Dividends are distributions of money, stock, or other property a corporation pays to
you because you own stock in that corporation. You also may receive dividends through a
partnership, an estate, a trust, or an association that is taxed as a corporation. Most
distributions are paid in cash. An individual may also receive distributions such as
additional stock, stock rights, or other property or services. The amount of a
distribution that is taxable depends on the type of distribution received.
Amounts paid on accounts with savings and loan associations and credit unions are often
called dividends, but the amounts are really interest and should be included with your
other interest income. For more information on interest income, see Topic
Ordinary dividends are the most common type of distribution from a corporation. They
are paid out of the earnings and profits of the corporation. All ordinary dividends are
Nontaxable distributions can be made in the form of a return of capital or a tax-free
distribution of additional shares of stock or stock rights. A return of capital is a
return of some or all of your investment in the stock of the company. What you paid for
the stock is your original basis in the stock. If you received the stock as a gift or as
an inheritance, your basis may be different. See Publication 551, Basis
of Assets and Publication 550, Investment Income and
Expenses. A return of capital reduces the basis of your stock and is not taxed until
your basis in the stock is fully recovered. Once the basis of your stock has been reduced
to zero, any further return of capital is a capital gain.
Capital gain distributions are paid by mutual funds and certain investment companies
from their net realized long-term capital gains. If you file Schedule D, Form 1040, report capital gain distributions as long-term capital
gains no matter how long you have owned the stock. If you don't have other capital gains
or losses to report for the year, you do not need to use Schedule D. Just report your
distributions on line 13 of Form 1040. See the Form 1040 Instructions. You cannot use Form
1040A. Report any capital gain distribution that an investment company or mutual fund
credited to you even if you did not actually receive it in cash.
You should receive a Form 1099- D-I-V, Dividends
and Distributions, from each payer for distributions of $10 or more. However, you must
report all taxable dividends even if you do not receive a statement.
The 1099- D-I-V statement should break down the distribution into the various
categories. If it does not, you should 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 to back-up withholding. See Topic 307 for more information on back-up withholding.
When receiving dividends, you may have to pay estimated tax, see Topic
355 for information on estimated tax.
Additional information on dividend income can be found in Publication
550, Investment Income and Expenses; and Publication 564, Mutual Fund Distributions,
which can be ordered by calling 1-800-829-3676.
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