If you invested in a company, or mutual funds, or any other share-based investment product last year, and the company paid dividends to you, that is income, and you must report it.
This page:
• Briefly describes the three different types of dividends
• Explains who needs to report dividends and what forms to use
• Suggests possible ways to avoid paying taxes on dividends
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If you own shares of a company, mutual funds, or have other investments, you will need to report the profits earned, called dividends, on your tax return.
By the end of January you should receive a 1099-DIV from each company in which you own stock. These statements will show the total amount of your investments in the company, accumulated profits, and whether you have chosen to have your profits distributed or reinvested.
The three types of dividends
When you receive all your 1099-DIV forms, you will notice that there are different amounts, entered in different boxes on the forms, signifying the kinds of dividends that you earned through each company.
So boxes 1,2, and 3 of your 1099-DIV represent the three types of dividend distributions:
Box 1:Ordinary dividends - fully taxable profits made from owning stock in a company.
Box 2:Capital Gain distributions - fully taxable financial gains earned through investments such as mutual funds.
Box 3.Nontaxable distributions - original investments returned to you due to an overload of investors. They are not taxed.
It is a good idea to begin collecting the needed forms long before April 15th, so you run less of a risk of needing a filing extension.
Note: if you have not received a 1099-DIV by the end of January from a company you expected to, you should contact the company and ask that another form be sent to you immediately.
Also: be aware that if you earn less than $10 in dividends from one company they are not required to send you a statement. However, you are still required to report your earnings to the IRS. In this case, the last statement you received for that year should show the total.
You could avoid paying taxes on dividends
You can avoid paying taxes on your dividends by reinvesting. If you have mutual funds or other investments for which you have capital gain distributions, you usually have the choice of either receiving the distributions or letting the investment company retain them.
If you let the company keep your investment profits, these distributions will then be reinvested by the company. In addition to you now owning more investment capital, the company will also pay the taxes on the reinvested distributions.
If this is the case you should receive Form 2439 in the mail from that company stating the amount of taxes paid in your name. You can include these amounts as taxes you have paid.
How to declare dividend income
First, let's look at how dividends are reported on paper returns:
You can declare dividend income on either Form 1040, or 1040a. You cannot use Form 1040EZ when declaring dividends.
When filing Form 1040, you will also need to attach Schedule B, if:
• Your ordinary dividends (box 1 of Form 1099-DIV) are more than $400, or
• You received, as a nominee, dividends that actually belong to someone else.
If you file Form 1040a, and you meet the criteria associated with Schedule B above, you will need to attach Schedule 1 (Form 1040a) with your return.
Both Schedule A and Schedule 1 are essentially sheets on which you record each company's name, address, and the total dividends you earned during the tax year. After adding the dividends from all your investments, you will calculate the total and enter it on your actual return.
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Related IRS publications
You can get more information about declaring dividend income, directly from the IRS, in the form of Publication 550 which also deals with another favorite subject, capital gains tax laws.
If you file a paper tax return, you will need to attach Schedule A with your 1040, or Schedule 1 with your 1040a. (If you do your taxes online, all of this will be taken care of for you electronically.)
Note: you will need an Adobe Acrobat Reader to view these publications, which you can get here. (But you probably already have it.)
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