Do I have to pay tax on stock dividends?

Corporate dividends are distributions of money, stock, or other property paid to you because you own stock in that corporation. You also may receive dividends through a partnership, an estate, a trust, S corporation, mutual fund, Real Estate Investment Trust (REIT), or an association that is taxed as a corporation. Most dividends are paid in cash, however, some are paid in stock or other property. An individual may also receive dividend distributions such as additional stock, stock rights, or other property or services.

You must report all taxable dividends on your tax return even if you do not receive a tax statement. You should receive a Form 1099-DIV, Dividends and Distributions, from each payer for distributions of $10.00 or more.

Form 1099-DIV will break down total gross dividends into several categories, such as ordinary dividends, nontaxable distributions, and capital gain distributions.

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

Effective January 1, 2003, dividends paid by most corporations are taxable as long-term capital gains. The new 15% and 5% capital gains rate applies to qualified dividends.

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 IRS Publication 551, Basis of Assets and IRS 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 and should be reported on Form 1040, Schedule D.

A stock dividend is taxable on your tax return when:

	you can elect to take either stock or cash, and you take stock;
	there are two or more classes of common stock and one or more receive cash and others receive stock;
	preferred stock is distributed to some common stockholders and common stock to other common stockholders;
	the dividend is of convertible preferred stock and is paid to common stockholders; unless the dividend does not result in the creation of disproportionate stock interests;
	the stock dividend can be redeemed immediately for cash;
	certain stock dividends paid to holders of preferred stock.

Report gross dividends that are over $1,500 on Schedule B of Form 1040 or Schedule 1 of Form 1040A. Ordinary dividends are carried over from Schedule B and reported on Line 9a on Form 1040 or 1040A. If your total gross dividends include capital gain distributions you cannot use Form 1040A. You must use the Form 1040 with Schedule B and Schedule D.

You must give your correct social security number to the payer of your dividend income. If you do not, you may be subject to a penalty tax and to backup tax withholding.

When receiving dividends, you may have to pay estimated tax.

Related tax information about stock dividends

Tax Directory Topics:
Dividends - Cooperative Banks
Dividends - Credit Unions
Dividends - Federal Savings & Loans
Dividends - Life Insurance Policies
Dividends - Mutual Funds
Dividends - Mutual Savings Banks
Dividends - Savings and Loans
Dividends - Reinvested
Income Related Questions and Answers

IRS publications about stock dividends:
Additional information about stock dividends can be found in IRS Publication 550,

Investment Income and Expenses, and IRS Publication 564,

Mutual Fund Distributions. Also see Chapter 9 of IRS Publication 17,

Your Federal Income Tax. Please read this IMPORTANT Editor's Note regarding navigating IRS publications with Adobe Acrobat Reader.
IRS publications can also be ordered by calling 1-800-829-3676.

Customer Support

Still have IRS or tax questions?
To view the alphabetical Master Index of all tax and IRS topics click here.

Ask Julian Block your IRS and tax questions!

If you can't find the answer to your IRS or tax question in our web you can call former IRS Special Agent and one of the country's foremost tax attorneys, nationally syndicated columnist ("The Tax Adviser") Julian Block. Julian is also the tax Editor of Mutual Funds Magazine, America's premier investment magazine.

To call Julian for a tax consultation click here.

Prepare your IRS tax return and State tax return online - If you'd like to e-file and/or print your IRS tax return or State tax return online click here.