Dividends are distributions of money, stock, or other property a corporation pays to you because you own stock in that corporation. You also may receive dividends through a partnership, an estate, a trust, or an association that is taxed as a corporation. Most distributions are paid in cash. An individual may also receive distributions such as additional stock, stock rights, or other property or services. The amount of a distribution that is taxable depends on the type of distribution received.

Amounts paid on accounts with savings and loan associations and credit unions are often called dividends, but the amounts are really interest and should be included with your other interest income. For more information on interest income, refer to Topic 403.

Ordinary dividends are the most common type of distribution from a corporation. They are paid out of the earnings and profits of the corporation. All ordinary dividends are fully taxable.

Nontaxable distributions can be made in the form of a return of capital or 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. What you paid for the stock is your original basis in the stock. If you received the stock as a gift or as an inheritance, your basis may be different. See Publication 551, Basis of Assets and Publication 550, Investment Income and Expenses. A return of capital 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.

Capital gain distributions are paid by mutual funds and certain investment companies from their net realized long-term capital gains. If you file Schedule D, Form 1040, report capital gain distributions as long-term capital gains no matter how long you have owned the stock. If you don't have other capital gains or losses to report for the year, you do not need to use Schedule D. Just report your distributions on line 13 of Form 1040. See the Form 1040 Instructions. You cannot use Form 1040A. Report any capital gain distribution that an investment company or mutual fund credited to you even if you did not actually receive it in cash.

You should receive a Form 1099 DIV, Dividends and Distributions, from each payer for distributions of $10 or more. However, you must report all taxable dividends even if you do not receive a statement.

The 1099 DIV statement should break down the distribution into the various categories. If it does not, you should contact the payer.

You must give your correct social security number to the payer of your dividend income. If you do not, you may be subject to backup withholding. Refer to Topic 307 for more information on backup withholding. then receiving dividends, you may have to pay estimated tax, Refer to Topic 355 for information on estimated tax.

Additional information on dividend income can be found in Publication 550, Investment Income and Expenses; and Publication 564, Mutual Fund Distributions.

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