Form 1099-DIV

Form 1099-DIV is the information return a payer files to report dividends and other distributions on stock paid to a shareholder during the calendar year. Its official title is "Dividends and Distributions", and the payer is usually a corporation, a mutual fund or other regulated investment company, a real estate investment trust, or the broker holding the shares as a nominee. The reporting trigger is $10 or more under section 6042 of the Internal Revenue Code, with a $600 threshold for liquidation distributions, so the general trade-or-business information reporting figure does not apply here.

The form is best read as a map rather than as a total. Only some of its boxes contain ordinary taxable dividends. Others contain long-term capital gain, a tax-free return of capital, tax-exempt interest passed through by a fund, and a figure that exists only to feed the qualified business income deduction. Nothing on the form adds up to a single number you report, which is why transcribing a box into the wrong line is the usual error.

Box 1a and box 1b are one figure and a slice of it. Box 1a, "total ordinary dividends", is the gross amount, and it includes the qualified dividends shown separately in box 1b. That relationship, and what makes a dividend qualified in the first place, are owned by the ordinary dividend and qualified dividend pages. What is worth adding here is what else the instructions require to be inside box 1a: dividends from money market funds, net short-term capital gains distributed by mutual funds, reinvested dividends and section 404(k) dividends paid directly from an employer corporation. A fund's short-term gains never appear as capital gain on this form, because distributing them converts them into ordinary dividends.

Boxes 2a through 2f are the capital gain family. Box 2a is the total capital gain distribution, which is always long-term whatever your own holding period, and which goes to Schedule D rather than to the dividend line. That is the capital gains distribution page's subject. Boxes 2b, 2c and 2d break out the slices taxed under their own rules: unrecaptured section 1250 gain, which carries a 25% rate ceiling; section 1202 gain from qualified small business stock; and collectibles gain, which carries a 28% rate ceiling. Boxes 2e and 2f are section 897 amounts and, as the instructions say, do not need to be completed for recipients who are US individuals.

Box 3 is the box people misread as free money. A nondividend distribution is a payment that exceeded the payer's earnings and profits, so it is legally a return of your own capital rather than a share of profit. It is not taxable when received, and it reduces your basis in the shares by the same amount. Once basis reaches zero, further nondividend distributions are capital gain. The consequence arrives later and in a different place: a smaller basis means a larger gain on sale. Brokers frequently reclassify part of a REIT's or a fund's distributions into this box in February, which is one of the ordinary reasons a corrected Form 1099-DIV arrives after a return has been filed.

Box 5 exists for one deduction. Section 199A dividends are qualified REIT dividends and the equivalent amounts paid by a regulated investment company, and the instructions confirm that this amount is also included in box 1a. It is reported separately because it is eligible for the qualified business income deduction, so it is subtracted out of the ordinary pile for that one purpose and left in it for every other.

Boxes 12 and 13 carry tax-exempt income through a fund. Box 12 is exempt-interest dividends, meaning municipal bond interest earned inside a fund and passed through to shareholders. It is generally excluded from federal gross income and is still reported, and it still matters on a return: it feeds the provisional income calculation that decides how much of a Social Security benefit is taxable, and it appears on Form 1040. Box 13 is the slice of box 12 attributable to specified private activity bonds, which is an alternative minimum tax item. Note that a fund pays exempt-interest dividends on Form 1099-DIV, while a bond you own directly pays tax-exempt interest reported in box 8 of Form 1099-INT.

The remaining boxes. Box 4 is federal income tax withheld, which here means backup withholding. Box 6 is investment expenses, which the instructions say is also included in box 1a. Boxes 7 and 8 report foreign tax paid and the country it went to, which is the input to the foreign tax credit. Boxes 9 and 10 are cash and noncash liquidation distributions, and the instructions caution that these apply only to corporations in partial or complete liquidation and must not also appear in box 1a. Box 11 is a FATCA reporting checkbox.

Two things that look like dividends and are reported elsewhere. The instructions carry an explicit caution: amounts commonly called dividends on deposit or share accounts at cooperative banks, credit unions, and domestic and federal savings and loan associations are legally interest, and they belong on Form 1099-INT. Separately, taxable dividend distributions from life insurance contracts and employee stock ownership plans go on Form 1099-R, and substitute payments in lieu of dividends, which arise when a broker lends out your shares, go on Form 1099-MISC. That last one is worth knowing because a substitute payment looks identical in an account and is never a qualified dividend.

Some recipients never get one. No Form 1099-DIV is required for payments to a corporation, a tax-exempt organization, an individual retirement arrangement, an Archer medical savings account, a health savings account, a US agency, a state, the District of Columbia, a US territory, or a registered securities or commodities dealer. This is why dividends inside a retirement account generate no form: not because they are invisible, but because the account is an exempt recipient.

Reading the form for a return means sending each box to its own destination.

1. Box 1a goes to the dividend line of Form 1040, and to Schedule B where ordinary dividends for the year exceed $1,500.

2. Box 1b goes to the qualified dividend line, where it is taxed at long-term capital gain rates through the worksheet rather than through a separate rate table.

3. Box 2a goes to Schedule D, as long-term capital gain, without touching Form 8949.

4. Box 3 goes nowhere on this year's return and instead reduces your basis in the shares.

5. Box 12 goes to the tax-exempt interest line of Form 1040, where it is reported and not taxed, and where it still counts toward the income measures that decide other things.

A hypothetical example of the box 3 mechanic, which is the one with a delayed consequence. Renata bought 500 shares of a REIT for $20 each, so her basis is $10,000. During the year the REIT distributes $1,200 to her, and the Form 1099-DIV splits it: $700 in box 1a as ordinary dividends, $300 in box 2a as a capital gain distribution, and $200 in box 3 as a nondividend distribution.

This year she reports $700 as ordinary dividends and $300 as long-term capital gain on Schedule D. The $200 is not income. It reduces her basis from $10,000 to $9,800. If she later sells the whole position for $11,000, her gain is $1,200, not the $1,000 the original purchase price would suggest. The $200 was not tax-free; it was tax-deferred, and it converted from a distribution into a capital gain on the way.

What the form does well

• It separates four genuinely different kinds of income that all arrive in the same account and would otherwise be indistinguishable to the recipient.
• Box 1b spares shareholders from applying the qualified dividend holding period tests themselves, since the payer has the data and they do not.
• Box 3 gives a written record of a basis adjustment that a shareholder would otherwise have no way to reconstruct years later.
• The $10 threshold means almost every taxable dividend is documented, which removes a large category of honest omission.

Where it causes trouble

• Boxes 1a and 1b overlap, and adding them is the single most common error on the form.
• Box 3's consequence arrives in a different tax year and a different section of the return, so it is easy to record the distribution and forget the basis reduction.
• Reclassification is routine for REITs and funds, which is why corrected forms in late February are ordinary rather than exceptional.
• Exempt-interest dividends in box 12 are federally tax-free and still count toward income measures such as the one deciding how much of a Social Security benefit is taxable, which surprises retirees.
• The distribution a fund pays and the tax it produces can be entirely unrelated to whether the investor made money, since a fund can distribute gains in a year the shares fell.