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, refer to Topic 403.
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 fully taxable.
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 DIV, 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 DIV 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 backup
withholding. Refer to Topic 307 for more information on backup
withholding. then receiving dividends, you may have to pay estimated
tax, Refer to 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
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