By Janet Berry-Johnson
Dividends are an important part of an investment portfolio. Companies reward their investors for their loyalty by issuing dividends, so the potential for dividend income plays a role in many investment choices.
We’ve created this overview of dividend income and Form 1099-DIV, the form used to report dividend income. Read on to learn what's included on the form and whether it's relevant to your situation.
This article will cover:
What is dividend income?
Dividend income is the distribution of a corporation's earnings and profits to its shareholders. Dividends may be paid as property or stock, but most companies pay dividends in cash.
According to Joshua Wu, tax partner at Greaves Wu, a law firm specializing in tax matters in Washington, D.C., there are two types of dividends.
“Ordinary dividends are paid from earnings and profits of a corporation and are taxed at ordinary income tax rates,” he explains. “Qualified dividends are taxed at a special rate, [0, 15 or 20 percent] depending on the taxpayer's situation, and are reported separately on Form 1099-DIV.”
To be a qualified dividend, the dividend must have been paid by a U.S. corporation or a qualified foreign corporation, and meet holding period requirements. The recipient should report all qualified dividends in box 1b of Form 1099-DIV.
What is Form 1099-DIV?
When you receive at least $10 in ordinary or qualified dividends from any one payer in a calendar year, the payer is required to report those dividends to you on Form 1099-DIV. Chris Hardy, a Certified Financial Planner™ and IRS enrolled agent with Paramount Tax and Accounting LLC near Atlanta, says that if you hold your investments in a brokerage such as Charles Schwab or Wells Fargo Advisors, "many times your 1099-DIV is included with a consolidated 1099 statement from your brokerage."
If you're a partner in a partnership or S corporation or the beneficiary of an estate or trust, those entities may report your dividend income on Schedule K-1.
Whether or not the payer sends you a form, you're still required to report all of your taxable dividend income on your return.
How do dividends differ from return of capital?
A return of capital is a distribution from a corporation that is a return of some or all of your original investment. Unlike a dividend, it’s not paid out of the earnings and profits of the corporation. It’s also known as a nondividend distribution.
Although return of capital is included in Box 3 of Form 1099-DIV, Wu says a return of capital is generally nontaxable. "The recipient reduces the cost basis of his or her stock by the nondividend distribution," he says. "If the taxpayer's basis is reduced to zero, then any further distributions are taxable as capital gains."
For example, say you purchase $100 of stock from XYZ Corp. Over the years that you hold that stock, XYZ pays out a return of capital distribution totaling $80. That $100 return of capital wouldn’t be taxable income, but you would reduce the basis of your stock to $20.
If you sell the stock later for $110, your capital gain on the sale would be $90 because the previous return of capital distributions reduced your basis in the stock to $20.
What is the threshold for reporting taxable ordinary dividends?
Although the payer isn’t required to issue a 1099-DIV unless it paid $10 or more in dividends, you’re still required to report and pay taxes on all dividends received, regardless of the amount. If you receive over $1,500 of taxable ordinary dividends, you must also attach Schedule B to your Form 1040.
About the Author: Janet Berry-Johnson is a CPA and a freelance writer with a background in accounting and insurance. Her writing has appeared in Forbes, Freshbooks, The Penny Hoarder, Discover Student Loans, Chase News & Stories, Capitalist Review, Guyvorce and Intuit's Firm of the Future blog. Janet lives in Arizona with her husband and son and their rescue dog, Dexter.
Disclaimer: We know taxes are complicated, so we provide this information for general educational purposes only. It isn’t intended to be personalized legal, financial or tax advice, and we don’t guarantee the accuracy, completeness or reliability of this content. If you have questions about your personal tax situation, consider contacting an accountant, tax attorney or financial advisor. Come back to Credit Karma Tax when you’re ready to file your taxes for free!