Tax Tips

Dividends refer to the money a corporation pays you because you own stock in that corporation.

Dividends are distributions of money, stock, 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, an S corporation or from an association that is taxed as a corporation. You should receive a Form 1099-DIV (if you receive distributions of $10 or more) or a Schedule K-1 if you received dividends from a partnership, estate, trust, or S corporation.

Ordinary dividends are the most common type of distribution from a corporation, and they are taxable as ordinary income unless they are qualified dividends. Qualified dividends are ordinary dividends that meet the requirements to be taxed at the maximum rates that apply to net capital gain.

Non-dividend distributions are distributions not paid from a corporation's profits. Non-dividend distributions can be made in cash or as 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. A return of capital distribution 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.

A liquidating distribution is a distribution paid to you in complete or partial liquidation of the stock you own in the corporation. The difference between the amount of the distribution and your basis in the shares is generally capital gain or loss.

Capital gain distributions may be paid by regulated investment companies (mutual funds) and real estate investment trust (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.

If stock or mutual fund dividends are automatically reinvested instead of receiving cash, maintain good records of all reinvested dividends each year. These reinvestments increase cost basis, and reduce gain or increase loss upon sale.

Form 1099-DIV should break down the distribution into the various categories. If it does not, contact the payor.

Related IRS Publications: 550, 564