One way to make money on your stock investments is through ordinary dividend payments. If the company makes a profit, the board of directors might vote to share a portion of those profits with the stockholders in the form of a dividend. Ordinary dividends are typically paid quarterly. The Internal Revenue Service considers ordinary dividends to be taxable as unearned investment income.
Dividends reflect a portion of the company's profits that are paid to investors. Most of the time they are paid in cash, but ordinary dividends can take other forms, such as additional stock or even merchandise. Regardless of what form they take, ordinary dividends are taxable as income in the year you receive them.
Interest vs. Dividends
Some savings institutions, such as credit unions, consider deposits from their members to be shares. They report earnings on those shares as dividends. For federal income tax purposes, dividends on such accounts are treated as taxable interest. Interest paid on shares in a money market mutual fund are treated as ordinary dividends for federal income tax purposes. Money market mutual funds should not be confused with money market accounts offered by banks or other federally insured savings institutions.
Any company that pays you more than $10 in dividends should provide you with a Form 1099-DIV after the end of the year, detailing the amount of your ordinary dividends. You're required to report and pay taxes on any dividends you receive, regardless of whether you received a Form 1099-DIV or not.
Unless the company tells you differently, you should assume any dividends you receive are ordinary dividends, according to the IRS. Report your dividends on Part II of Schedule B, then transfer the total amount of your ordinary dividends to Line 9a of Form 1040 or 1040A. Add the amount of your ordinary dividends to your other income to determine your total income for the year.
- Internal Revenue Service: Topic 404 - Dividends
- Internal Revenue Service: Publication 17, Dividends and Other Distributions
- Internal Revenue Service: Publication 550, Dividends and Other Distributions
- Internal Revenue Service: Form 1040
- Internal Revenue Service: Schedule B
- Internal Revenue Service: 1099-DIV Dividend Income
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