Tax Implications of a Dividend

Dividends are distributions of money, stock, or other property. A corporation pays you in these if you own stock in that corporation. You also might receive dividends through one of these:

  • Partnerships
  • Estates
  • Trusts
  • S corporations
  • Associations taxed as a corporation

If you receive dividends in significant amounts, you might have to pay estimated tax.

You should receive a Form 1099-DIV from each payor for distributions of $10 or more. Also, if you receive any of these dividends, you should receive a Schedule K-1. It’ll show the dividends taxable to your:

  • Partnership
  • Estate
  • Trust
  • S corporation

If you didn’t receive a Form 1099-DIV or Schedule K-1, you’ll still need to report all taxable dividends.

Ordinary dividends are the most common type of distribution from a corporation. They’re taxable as ordinary income unless they’re qualified dividends. Qualified dividends are ordinary dividends taxed at the lower rates that apply to net long-term capital gain. Qualified dividends must meet certain requirements.

Nondividend distributions are those not paid from a corporation’s profits. They’re usually:

  • Cash
  • 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. A return of capital distribution:

  • Reduces the basis of your stock
  • Isn’t taxed until your basis in the stock is fully recovered

After the basis of your stock is reduced to zero, any further return of capital is taxed as capital gain.

A corporation you own stock in might partially or completely liquidate. In that case, the corporation pays you liquidating distribution. The difference between the amount of the distribution and your basis in the shares is usually a capital gain or loss.

Capital gain distributions might be paid by one of these:

  • Regulated investment companies (mutual funds)
  • 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.

Form 1099-DIV should list the distribution in the various categories. If it doesn’t, contact the payor.

To learn more, see these tax tips:

  • Interest Income
  • Form 1099

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