Dividends are payments made by corporations to shareholders as a share of company profits. They are usually paid in cash but may also be given as stock or other assets. Individuals can also receive dividends through partnerships, estates, trusts, or other corporate structures.
Types of Dividends
Dividends are mainly classified into two categories:
Ordinary Dividends - These are the most common type and are taxed as regular income.
Qualified Dividends - These meet specific IRS criteria and are taxed at a lower capital gains tax rate.
Corporations report dividend payments to shareholders using Form 1099-DIV if the total amount paid is at least $10. If you are a partner in a partnership or a beneficiary of a trust or estate, you may need to report your share of dividends, even if they are not directly paid to you.
Return of Capital
Some payments from a corporation are not considered dividends but rather a return of capital. These payments reduce the cost basis of your stock. Once the cost basis reaches zero, any further distributions become taxable as capital gains.
Capital Gain Distributions
Investment funds such as mutual funds, exchange-traded funds (ETFs), and real estate investment trusts (REITs) may distribute capital gains to shareholders. These distributions are always treated as long-term capital gains, regardless of how long you have held the investment. Such distributions are reported using Form 2439 if they are not paid out directly.
Tax Reporting and Compliance
If you receive more than $1,500 in ordinary dividends, you must report them on Schedule B (Form 1040).
Ensure that your Social Security number is correctly provided to the dividend payer to avoid penalties and backup withholding.
If you receive significant dividend income, you may be subject to the Net Investment Income Tax (NIIT) and might need to make estimated tax payments to avoid penalties.