Other Distributions
You may receive any of the following distributions during the year.
Exempt-interest dividends. Exempt-interest dividends you receive
from a regulated investment company (mutual fund) are not included in your taxable income.
You will receive a notice from the mutual fund telling you the amount of the
exempt-interest dividends you received. Exempt-interest dividends are not shown on Form
1099-DIV or Form 1099-INT.
Information reporting requirement. Although exempt-interest dividends are not taxable, you must show them on your
tax return if you have to file a return. This is an information reporting
requirement and does not change the exempt-interest dividends to taxable income. See Reporting
tax-exempt interest under How To Report Interest Income, earlier.
Alternative minimum tax treatment. Exempt-interest
dividends paid from specified private activity bonds may be subject to the alternative
minimum tax. See Form 6251 and its instructions for more information.
Dividends on insurance policies. Insurance policy dividends that the insurer keeps and uses to pay your
premiums are not taxable. However, you must report as taxable interest income the
interest that is paid or credited on dividends left with the insurance company.
If dividends on an insurance contract (other than a modified endowment contract) are
distributed to you, they are a partial return of the premiums you paid. Do not include
them in your gross income until they are more than the total of all net premiums you paid
for the contract. (For information on the treatment of a distribution from a modified
endowment contract, see Distribution Before Annuity Starting Date From a Nonqualified
Plan under Taxation of Nonperiodic Payments in Publication 575, Pension
and Annuity Income.) Report any taxable distributions on insurance policies on line
16b (Form 1040) or line 12b (Form 1040A).
Dividends on veterans' insurance. Dividends you receive on veterans'
insurance policies are not taxable. In addition, interest on dividends left with the
Department of Veterans Affairs is not taxable.
Patronage dividends. Generally,
patronage dividends you receive in money from a cooperative organization are included in
your income.
Do not include in your income patronage dividends you receive on:
- Property bought for your personal use, or
- 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.
These rules are the same whether the cooperative paying the dividend is a taxable or
tax-exempt cooperative.
Alaska Permanent Fund dividends. Do not report these amounts as dividends. Instead, report these amounts
on line 21 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ.
How To Report
Dividend 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 9 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, later. If you receive
nontaxable distributions required to be reported as capital gains, you must use Form 1040.
You cannot use Form 1040EZ if you receive any dividend income.
Form 1099-DIV. If you owned
stock on which you received $10 or more in dividends and other distributions, you should
receive a Form 1099-DIV. Even if you do not receive a Form 1099-DIV, you must
report all of your taxable dividend income.
1099 DIV
See Form 1099-DIV for more information on how to report dividend income.
Form 1040A. You must complete Part II of Schedule 1 (Form 1040A) and
attach it to your Form 1040A, if:
- Your ordinary dividends (box 1 of Form 1099-DIV) are more than $1,500, or
- You received, as a nominee, dividends that actually belong to someone else.
List on line 5 each payer's name and the amount of ordinary dividends you received. If
you received a Form 1099-DIV from a brokerage firm, list the brokerage firm as the payer.
Enter on line 6 the total of the amounts listed on line 5. (However, if you hold stock
as a nominee, see Nominees, later.) Also enter this total on line 9, Form 1040A.
Form 1040. You must fill in Part II of Schedule B and attach it to
your Form 1040, if:
- Your ordinary dividends ( box 1 of Form 1099-DIV) are more than $1,500, or
- You received, as a nominee, dividends that actually belong to someone else.
If your ordinary dividends are more than $1,500, you must also complete Part III of
Schedule B.
List on line 5, Part II of Schedule B, each payer's name and the amount of ordinary
dividends you received. If your securities are held by a brokerage firm (in street
name), list the name of the brokerage firm that is shown on Form 1099-DIV as the
payer. If your stock is held by a nominee who is the owner of record, and the nominee
credited or paid you dividends on the stock, show the name of the nominee and the
dividends you received or for which you were credited.
Enter on line 6 the total of the amounts listed on line 5. (However, if you hold stock
as a nominee, see Nominees, later.) Also enter this total on line 9, Form 1040.
Dividends received on restricted stock. Restricted stock is stock that you get from your employer for services you
perform and that is nontransferable and subject to a substantial risk of
forfeiture. You do not have to include the value of the stock in your income when you
receive it. However, if you get dividends on restricted stock, you must include them in
your income as wages, not dividends. See Restricted Property in Publication 525
for information on restricted stock dividends.
Your employer should include these dividends in the wages shown on your Form W-2. If
you also get a Form 1099-DIV for these dividends, list them on line 5 of Schedule 1 (Form
1040A) or Schedule B (Form 1040), with the other dividends you received. Enter a subtotal
of all your dividend income several lines above line 6. Below the subtotal, write Dividends
on restricted stock reported as wages on line 7, Form 1040, and enter the amount of
the dividends included in your wages on line 7, Form 1040. Subtract this amount from the
subtotal and enter the result on line 6.
Election. You can choose to include the value of restricted
stock in gross income as pay for services. If you make this choice, report the dividends
on the stock like any other dividends. List them on line 5, Part II of Schedule 1 or
Schedule B, along with your other dividends (if the amount of ordinary dividends received
from all sources is more than $1,500). If you receive both a Form 1099-DIV and a Form W-2
showing these dividends, do not include the dividends in your wages reported on line 7,
Form 1040. Attach a statement to your Form 1040 explaining why the amount shown on line 7
of your Form 1040 is different from the amount shown on your Form W-2.
Independent contractor. If you received restricted stock
for services as an independent contractor, the rules in the previous discussion apply.
Generally, you must treat dividends you receive on the stock as income from
self-employment.
Capital gain distributions. How
to report capital gain distributions depends on whether you have any other capital gains
or losses. If you do, report capital gain distributions (box 2a of Form 1099-DIV)
in column (f) of line 13, Part II of Schedule D (Form 1040). If you do not have any other
capital gains or losses, you may be able to report your capital gain distributions
directly on line 13 of Form 1040 or line 10 of Form 1040A. In either case, see Reporting
Capital Gains and Losses in chapter 4 for more information.
The mutual fund or real estate investment trust (REIT) making the distribution should
tell you how much of it is:
- Qualified 5-year gain (box 2c),
- Unrecaptured section 1250 gain (box 2d), or
- Section 1202 gain (box 2e).
For information about these terms, see Capital Gain Tax Rates in chapter 4.
Enter on line 5 of the Qualified 5-Year Gain Worksheet in the Schedule D
instructions the part reported to you as qualified 5-year gain. Enter on line 11 of the Unrecaptured
Section 1250 Gain Worksheet in the Schedule D instructions the part reported to you
as unrecaptured section 1250 gain. If you have a gain on qualified small business stock
(section 1202 gain), follow the reporting instructions under Section 1202 Exclusion in
chapter 4.
Nontaxable (return of capital) distributions. Report return of capital distributions (box 3 of Form 1099-DIV) only after
your basis in the stock has been reduced to zero. After the basis of your stock has
been reduced to zero, you must show this amount on line 1, Part I of Schedule D, if you
held the stock 1 year or less. Show it on line 8, Part II of Schedule D, if you held the
stock for more than 1 year. Write Dividend R.O.C. Exceeding Basis in column (a)
of Schedule D and the name of the company. Report your gain in column (f). Your gain is
the amount of the distribution that is more than your basis in the stock.
Nominees. If you received
ordinary dividends as a nominee (that is, the dividends are in your name but actually
belong to someone else), include them on line 5 of Schedule 1 (Form 1040A) or
Schedule B (Form 1040). Several lines above line 6, put a subtotal of all dividend income
listed on line 5. Below this subtotal, write Nominee Distribution and show the
amounts received as a nominee. Subtract the total of your nominee distributions from the
subtotal. Enter the result on line 6.
File Form 1099-DIV with the IRS. If you received dividends as a nominee in 2002, you must file a Form 1099-DIV
for those dividends with the IRS. Send the Form 1099-DIV with a Form 1096, Annual
Summary and Transmittal of U.S. Information Returns, to your Internal Revenue Service
Center by February 28, 2003 (March 31, 2003 if you file Form 1099-DIV electronically).
Give the actual owner of the dividends Copy B of the Form 1099-DIV by January 31, 2003. On
Form 1099-DIV, you should be listed as the Payer. The other owner should be
listed as the Recipient. You do not, however, have to file a Form 1099-DIV to
show payments for your spouse. For more information about the reporting requirements and
the penalties for failure to file (or furnish) certain information returns, see the General
Instructions for Forms 1099, 1098, 5498, and W-2G.
Liquidating distributions. If
you receive a liquidating distribution on stock, the corporation will give you a Form
1099-DIV showing the amount of the liquidating distribution in boxes 8 and 9.
Stripped
Preferred Stock
If the dividend rights are stripped from certain
preferred stock, the holder of the stripped preferred stock may have to include
amounts in income equal to the amounts that would have been included if the stock were a
bond with original issue discount (OID).
Stripped preferred stock defined. Stripped preferred stock is any
stock that meets both of the following tests.
- There has been a separation in ownership between the stock and any dividend on the stock
that has not become payable.
- The stock:
- Is limited and preferred as to dividends,
- Does not participate in corporate growth to any significant extent, and
- Has a fixed redemption price.
Treatment of buyer. If you buy stripped preferred stock after April
30, 1993, you must include certain amounts in your gross income while you hold the stock.
These amounts are ordinary income. They are equal to the amounts you would have included
in gross income if the stock were a bond that:
- Was issued on the purchase date of the stock, and
- Has OID equal to:
- The redemption price for the stock, minus
- The price at which you bought the stock.
Report these amounts as other income on line 21 of Form 1040. For information about
OID, see Original Issue Discount (OID), earlier.
This treatment also applies to you if you acquire the stock in such a way (for example,
by gift) that your basis in the stock is determined by using a buyer's basis.
Treatment of person stripping stock. If you strip the rights to one
or more dividends from stripped preferred stock, you are treated as having purchased the
stock. You are treated as making the purchase on the date you disposed of the dividend
rights. Your adjusted basis in the stripped preferred stock is treated as your purchase
price. The rules described in Treatment of buyer, earlier, apply to you.
REMICs, FASITs,
and Other CDOs
Holders of interests in real estate mortgage investment conduits
(REMICs), financial asset securitization investment trusts (FASITs), and other
collateralized debt obligations (CDOs) must follow special rules for reporting income and
any expenses from these investment products.
REMICs
A real estate mortgage investment conduit (REMIC) is an entity that is
formed for the purpose of holding a fixed pool of mortgages secured by interests in real
property. A REMIC issues regular and residual interests to investors. For tax purposes, a
REMIC is generally treated as a partnership with the residual interest holders treated as
the partners. The regular interests are treated as debt instruments.
REMIC income or loss is not income or loss from a passive activity.
For more information about the qualifications and the tax treatment that apply to a
REMIC and the interests of investors in a REMIC, see sections 860A through 860G of the
Internal Revenue Code, and the regulations under those sections.
Regular Interest
A REMIC can have several classes (also known as tranches) of
regular interests. A regular interest unconditionally entitles the holder to
receive a specified principal amount (or other similar amount).
A REMIC regular interest is treated as a debt instrument for income tax purposes.
Accordingly, the OID, market discount, and income reporting rules that apply to bonds and
other debt instruments as described earlier in this publication under Discount on Debt
Instruments apply, with certain modifications discussed below.
Generally, you report your income from a regular interest on line 8a, Form 1040. For
more information on how to report interest and OID, see How To Report Interest Income,
earlier.
Holders must use accrual method. Holders of regular interests must
use an accrual method of accounting to report OID and interest income. Because income
under an accrual method is not determined by the receipt of cash, you may have to include
OID or interest income in your taxable income even if you have not received any cash
payments.
Forms 1099-INT and 1099-OID. You
should receive a copy of Form 1099-INT or Form 1099-OID from the REMIC. You will
also receive a written statement by March 17, 2003 (if you are a calendar year taxpayer),
that provides additional information. The statement should contain enough information to
enable you to figure your accrual of market discount or amortizable bond premium.
Form 1099-INT shows the amount of interest income that accrued to you for the period
you held the regular interest.
Form 1099-OID shows the amount of OID and interest, if any, that accrued to you for the
period you held the regular interest. You will not need to make any adjustments to the
amounts reported even if you held the regular interest for only a part of the calendar
year. However, if you bought the regular interest at a premium or acquisition premium, see
Refiguring OID shown on Form 1099-OID under Original Issue Discount (OID), earlier.
You may not get a Form 1099. Corporations and other persons
specified in Regulation 1.6049-7(c) will not receive Forms 1099. These persons and fiscal
year taxpayers may obtain tax information by contacting the REMIC or the issuer of the
CDO, if they hold their interest directly from the REMIC or issuer of the CDO. Publication
938, Real Estate Mortgage Investment Conduits (REMICs) Reporting Information, explains
how to request this information.
 Publication
938 is available only on the Internet at www.irs.gov.
If you hold a regular interest or CDO through a nominee (rather than directly), you can
request the information from the nominee.
Allocated investment expenses. Regular interest holders in a REMIC
may be allowed to deduct the REMIC's investment expenses, but only if the REMIC is a single-class
REMIC. A single-class REMIC is one that generally would be classified as a trust
for tax purposes if it had not elected REMIC status.
The single-class REMIC will report your share of its investment expenses in box 5 of
Form 1099-INT or box 7 of Form 1099-OID. It will also include this amount in box 1 of Form
1099-INT or box 2 of Form 1099-OID, and on the additional written statement.
You may be able to take a deduction for these expenses subject to a 2% limit that also
applies to certain other miscellaneous itemized deductions. See chapter 3 for more
information.
Redemption of regular interests at maturity. Redemption of debt
instruments at their maturity is treated as a sale or exchange. You must report
redemptions on your tax return whether or not you realize gain or loss on the transaction.
Your basis is your adjusted issue price, which includes any OID you previously reported in
income.
Any amount that you receive on the retirement of a debt instrument is treated in the
same way as if you had sold or exchanged that instrument. A debt instrument is retired
when it is reacquired or redeemed by the issuer and canceled.
Sale or exchange of a regular interest. Some of your gain
on the sale or exchange of a REMIC regular interest may be ordinary income. The ordinary
income part, if any, is:
- The amount that would have been included in your income if the yield to maturity on the
regular interest had been 110% of the applicable federal rate at the beginning of your
holding period, minus
- The amount you included in your income.
Residual Interest
A residual interest is an interest in a REMIC that is not a regular
interest. It is designated as a residual interest by the REMIC.
If you acquire a residual interest in a REMIC, you must take into account, on a
quarterly basis, your daily portion of the taxable income or net loss of the REMIC for
each day during the tax year that you hold the residual interest. You must report these
amounts as ordinary income or loss.
Basis in the residual interest. Your basis in the residual interest is increased by the amount of taxable
income you take into account. Your basis is decreased (but not below zero) by the
amount of cash or the fair market value of any property distributed to you, and by the
amount of any net loss you have taken into account. If you sell your residual interest,
you must adjust your basis to reflect your share of the REMIC's taxable income or net loss
immediately before the sale. See Wash Sales, in chapter 4, for more information
about selling a residual interest.
Treatment of distributions. You must include in your gross income
the part of any distribution that is more than your adjusted basis. Treat the distribution
as a gain from the sale or exchange of your residual interest.
Schedule Q. If you hold a
REMIC residual interest, you should receive Schedule Q (Form 1066), Quarterly Notice
to Residual Interest Holder of REMIC Taxable Income or Net Loss Allocation, and
instructions from the REMIC each quarter. Schedule Q will indicate your share of the
REMIC's quarterly taxable income (or loss). Do not attach the Schedule Q to your tax
return. Keep it for your records.
Use Part IV of Schedule E (Form 1040) to report your total share of the REMIC's taxable
income (or loss) for each quarter included in your tax year.
For more information about reporting your income (or loss) from a residual interest in
a REMIC, follow the Schedule Q (Form 1066) and Schedule E (Form 1040) instructions.
Expenses. Subject to the 2%-of-adjusted- gross-income limit, you may
be able to claim a miscellaneous itemized deduction for certain ordinary and necessary
expenses that you paid or incurred in connection with your investment in a REMIC. These
expenses may include certain expense items incurred by the REMIC and passed through to
you. The REMIC will report these expenses to you on line 3b of Schedule Q. See chapter 3
for information on how to report these expenses.
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