Table of Contents
Foreign income. If you are a U.S. citizen with dividend income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer.
This chapter discusses the tax treatment of:
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Ordinary dividends,
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Capital gain distributions,
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Nondividend distributions, and
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Other distributions you may receive from a corporation or a mutual fund.
This chapter also explains how to report dividend income on your tax return.
Dividends are distributions of money, stock, or other property paid to you by a corporation. You also may receive dividends through a partnership, an estate, a trust, or an association that is taxed as a corporation. However, some amounts you receive that are called dividends are actually interest income. (See Dividends that are actually interest under Taxable Interest in chapter 7.)
Most distributions are paid in cash (or check). However, distributions can consist of more stock, stock rights, other property, or services.
Publication
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514 Foreign Tax Credit for Individuals
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550 Investment Income and Expenses
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564 Mutual Fund Distributions
Form (and Instructions)
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Schedule B (Form 1040) Interest and Ordinary Dividends
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Schedule 1 (Form 1040A) Interest and Ordinary Dividends for Form 1040A Filers
This section discusses general rules for dividend income.
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The child was under age 18 at the end of 2007. A child born on January 1, 1990, is considered to be age 18 at the end of 2007.
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The child had more than $1,700 of investment income (such as taxable interest and dividends) and has to file a tax return.
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Either parent was alive at the end of 2007.
For more information on SSNs and ITINs, see Social security number (SSN) in chapter 7.
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 1a of the Form 1099-DIV you receive.
Qualified dividends are the ordinary dividends that are subject to the same 5% or 15% maximum tax rate that applies to net capital gain. They should be shown in box 1b of the Form 1099-DIV you receive.
Qualified dividends are subject to the 15% rate if the regular tax rate that would apply is 25% or higher. If the regular tax rate that would apply is lower than 25%, qualified dividends are subject to the 5% rate.
To qualify for the 5% or 15% maximum rate, all of the following requirements must be met.
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The dividends must have been paid by a U.S. corporation or a qualified foreign corporation. (See Qualified foreign corporation later.)
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The dividends are not of the type listed later under Dividends that are not qualified dividends.
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You meet the holding period (discussed next).
Example 1.
You bought 5,000 shares of XYZ Corp. common stock on June 28, 2007. XYZ Corp. paid a cash dividend of 10 cents per share. The ex-dividend date was July 6, 2007. Your Form 1099-DIV from XYZ Corp. shows $500 in box 1a (ordinary dividends) and in box 1b (qualified dividends). However, you sold the 5,000 shares on August 1, 2007. You held your shares of XYZ Corp. for only 34 days of the 121-day period (from June 29, 2007, through August 1, 2007). The 121-day period began on May 7, 2007 (60 days before the ex-dividend date), and ended on September 4, 2007. You have no qualified dividends from XYZ Corp. because you held the XYZ stock for less than 61 days.
Example 2.
Assume the same facts as in Example 1 except that you bought the stock on July 5, 2007 (the day before the ex-dividend date), and you sold the stock on September 6, 2007. You held the stock for 63 days (from July 6, 2007, through September 6, 2007). The $500 of qualified dividends shown in box 1b of your Form 1099-DIV are all qualified dividends because you held the stock for 61 days of the 121-day period (from July 6, 2007, through September 4, 2007).
Example 3.
You bought 10,000 shares of ABC Mutual Fund common stock on June 28, 2007. ABC Mutual Fund paid a cash dividend of 10 cents a share. The ex-dividend date was July 6, 2007. The ABC Mutual Fund advises you that the portion of the dividend eligible to be treated as qualified dividends equals 2 cents per share. Your Form 1099-DIV from ABC Mutual Fund shows total ordinary dividends of $1,000 and qualified dividends of $200. However, you sold the 10,000 shares on August 1, 2007. You have no qualified dividends from ABC Mutual Fund because you held the ABC Mutual Fund stock for less than 61 days.
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You had an option to sell, were under a contractual obligation to sell, or had made (and not closed) a short sale of substantially identical stock or securities.
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You were grantor (writer) of an option to buy substantially identical stock or securities.
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Your risk of loss is diminished by holding one or more other positions in substantially similar or related property.
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The corporation is incorporated in a U.S. possession.
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The corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the Treasury Department determines is satisfactory for this purpose and that includes an exchange of information program. For a list of those treaties, see Table 8-1.
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The corporation does not meet (1) or (2) above, but the stock for which the dividend is paid is readily tradable on an established securities market in the United States. See Readily tradable stock, later.
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Capital gain distributions.
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Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U.S. building and loan associations, U.S. savings and loan associations, federal savings and loan associations, and similar financial institutions. (Report these amounts as interest income.)
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Dividends from a corporation that is a tax-exempt organization or farmer's cooperative during the corporation's tax year in which the dividends were paid or during the corporation's previous tax year.
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Dividends paid by a corporation on employer securities which are held on the date of record by an employee stock ownership plan (ESOP) maintained by that corporation.
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Dividends on any share of stock to the extent that you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property.
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Payments in lieu of dividends, but only if you know or have reason to know that the payments are not qualified dividends.
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Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends.
Table 8-1. Income Tax Treaties
Income tax treaties the United States has with the following countries satisfy requirement (2) under Qualified foreign corporation. | ||
Australia | Indonesia | Romania |
Austria | Ireland | Russian |
Bangladesh 1 | Israel | Federation |
Barbados 2 | Italy | Slovak |
Belgium | Jamaica | Republic |
Canada | Japan | Slovenia |
China | Kazakhstan | South Africa |
Cyprus | Korea | Spain |
Czech | Latvia | Sri Lanka 3 |
Republic | Lithuania | Sweden |
Denmark | Luxembourg | Switzerland |
Egypt | Mexico | Thailand |
Estonia | Morocco | Trinidad and |
Finland | Netherlands | Tobago |
France | New Zealand | Tunisia |
Germany | Norway | Turkey |
Greece | Pakistan | Ukraine |
Hungary | Philippines | United |
Iceland | Poland | Kingdom |
India | Portugal | Venezuela |
1Effective for dividends paid after August 6, 2006.
2Effective for dividends paid after December 19, 2004. 3Effective for dividends paid after July 11, 2004. |
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 still 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 28 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.
Capital gain distributions (also called capital gain dividends) are paid to you or credited to your account by mutual funds (or other regulated investment companies) and real estate investment trusts (REITs). They will be shown in box 2a of the Form 1099-DIV you receive from the mutual fund or REIT.
Report capital gain distributions as long-term capital gains regardless of how long you owned your shares in the mutual fund or REIT.
A nondividend distribution is a distribution that is not paid out of the earnings and profits of a corporation. You should receive a Form 1099-DIV or other statement from the corporation showing the nondividend distribution. On Form 1099-DIV, a nondividend distribution will be shown in box 3. If you do not receive such a statement, you report the distribution as an ordinary dividend.
Example.
You bought stock in 1995 for $100. In 1998, you received a nondividend distribution of $80. You did not include this amount in your income, but you reduced the basis of your stock to $20. You received a nondividend distribution of $30 in 2007. The first $20 of this amount reduced your basis to zero. You report the other $10 as a long-term capital gain for 2007. You must report as a long-term capital gain any nondividend distribution you receive on this stock in later years.
Liquidating distributions, sometimes called liquidating dividends, are distributions you receive during a partial or complete liquidation of a corporation. These distributions are, at least in part, one form of a return of capital. They may be paid in one or more installments. You will receive a Form 1099-DIV from the corporation showing you the amount of the liquidating distribution in box 8 or 9.
For more information on liquidating distributions, see chapter 1 of Publication 550.
Distributions by a corporation of its own stock are commonly known as stock dividends. Stock rights (also known as “stock options”) are distributions by a corporation of rights to acquire the corporation's stock. Generally, stock dividends and stock rights are not taxable to you, and you do not report them on your return.
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You or any other shareholder has the choice to receive cash or other property instead of stock or stock rights.
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The distribution gives cash or other property to some shareholders and an increase in the percentage interest in the corporation's assets or earnings and profits to other shareholders.
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The distribution is in convertible preferred stock and has the same result as in (2).
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The distribution gives preferred stock to some common stock shareholders and common stock to other common stock shareholders.
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The distribution is on preferred stock. (The distribution, however, is not taxable if it is an increase in the conversion ratio of convertible preferred stock made solely to take into account a stock dividend, stock split, or similar event that would otherwise result in reducing the conversion right.)
If you receive taxable stock dividends or stock rights, include their fair market value at the time of the distribution in your income.
Example.
You own one share of common stock that you bought on January 3, 1999, for $100. The corporation declared a common stock dividend of 5% on June 30, 2007. The fair market value of the stock at the time the stock dividend was declared was $200. You were paid $10 for the fractional-share stock dividend under a plan described in the above paragraph. You figure your gain or loss as follows:
Fair market value of old stock | $200.00 |
Fair market value of stock dividend (cash received) | +10.00 |
Fair market value of old stock and stock dividend | $210.00 |
Basis (cost) of old stock after the stock dividend (($200 ÷ $210) × $100) | $95.24 |
Basis (cost) of stock dividend (($10 ÷ $210) × $100) | + 4.76 |
Total | $100.00 |
Cash received | $10.00 |
Basis (cost) of stock dividend | − 4.76 |
Gain | $5.24 |
Because you had held the share of stock for more than 1 year at the time the stock dividend was declared, your gain on the stock dividend is a long-term capital gain.
You may receive any of the following distributions during the year.
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Property bought for your personal use, or
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Capital assets or depreciable property bought for use in your business. But you must reduce the basis (cost) of the items bought. If the dividend is more than the adjusted basis of the assets, you must report the excess as income.
Generally, you can use either Form 1040 or Form 1040A to report your dividend income. Report the total of your ordinary dividends on line 9a of Form 1040 or Form 1040A. Report qualified dividends on line 9b of Form 1040 or Form 1040A.
If you receive capital gain distributions, you may be able to use Form 1040A or you may have to use Form 1040. See Capital gain distributions only in chapter 16. If you receive nondividend distributions required to be reported as capital gains, you must use Form 1040. You cannot use Form 1040EZ if you receive any dividend income.
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Your ordinary dividends (Form 1099-DIV, box 1a) are more than $1,500, or
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You received, as a nominee, dividends that actually belong to someone else.
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Qualified dividends you received as a nominee. See Nominees under How to Report Dividend Income in chapter 1 of Publication 550.
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Dividends on stock for which you did not meet the holding period. See Holding period earlier under Qualified Dividends.
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Dividends on any share of stock to the extent that you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property.
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Payments in lieu of dividends, but only if you know or have reason to know that the payments are not qualified dividends.
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Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends.
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