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Current Year Tax Map
Rev. date: 01/01/2011


Tax Topic 404
Dividends are distributions of property a corporation pays you because you own stock in that corporation. Most dividends are paid in cash. However, dividends may be paid as stock of another corporation or any other property. You also may receive dividends through your interest in a partnership, an estate, a trust, a subchapter S corporation or from an association that is taxable as a corporation. 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. Additionally, a shareholder that provides services to a corporation may be deemed to receive a dividend if the corporation pays the shareholder service-provider in excess of what it would pay a third-party for the same services. 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, Dividends and Distributions, from each payer for distributions of at least $10.00. 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. You must report all taxable dividends even if you do not receive a Form 1099-DIV or Schedule K-1.
Dividends are the most common type of distribution from a corporation. They are paid out of the earnings and profits of the corporation. Dividends can either be classified as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates. See Publication 550, Investment Income and Expenses, for a definition of qualified dividends.
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 Tax 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 (e.g. mutual funds, exchange traded funds, money market funds, etc.) 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. Please refer to the Instructions 1040 (General Inst.) or Instructions 1040-A 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 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/or back-up withholding. Refer to Tax 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.