Pub. 17, Chapter 9 - Dividends & Other Corporate Distributions
Ordinary (taxable) dividends are the most common type of
distribution from a corporation. They are paid out of the earnings and
profits of a corporation and are ordinary income to you. This means
they are not capital gains. You can assume that any dividend you
receive on common or preferred stock is an ordinary dividend unless
the paying corporation tells you otherwise. Ordinary dividends will be
shown in box 1 of the Form 1099-DIV you receive.
Dividends used to buy more stock.
The corporation in which you own stock may have a dividend
reinvestment plan. This plan lets you choose to use your
dividends to buy (through an agent) more shares of stock in the
corporation instead of receiving the dividends in cash. If you are a
member of this type of plan and you use your dividends to buy more
stock at a price equal to its fair market value, you must report the
dividends as income.
If you are a member of a dividend reinvestment plan that lets you
buy more stock at a price less than its fair market value, you must
report as dividend income the fair market value of the additional
stock on the dividend payment date.
You also must report as dividend income any service charge
subtracted from your cash dividends before the dividends are used to
buy the additional stock. But you may be able to deduct the service
charge. See chapter 30
for more information about deducting expenses
of producing income.
In some dividend reinvestment plans, you can invest more cash to
buy shares of stock at a price less than fair market value. If you
choose to do this, you must report as dividend income the difference
between the cash you invest and the fair market value of the stock you
buy. When figuring this amount, use the fair market value of the stock
on the dividend payment date.
Money market funds.
Report amounts you receive from money market funds as dividend
income. Money market funds are a type of mutual fund and should not be
confused with bank money market accounts that pay interest.
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