If any of your investments pay you dividends, then you'll probably receive at least one 1099 DIV form in the mail come tax time. The 1099 DIV form is sent to both you and the IRS by financial institutions such as brokerages and banks, and it reports dividends and distributions made to you -- even if they were reinvested and not taken as cash. Capital gains distributions from mutual funds are also reported via 1099 DIV forms.
Let's go over the basics of the 1099 DIV form for those who may have to report these payouts on their tax return.
Nuts and bolts -- and boxes
One key thing to note about the 1099 DIV form is that that both you and the IRS receive it. So if you were hoping to simply not report dividend income to Uncle Sam, I'm sorry to say that the IRS knows about this income and will reconcile the reports it receives with the tax return you file. This also means that you don't need to file the form along with your tax return, as the IRS will already have the information it needs. That said, you'll probably need to refer to form 1099 DIV when you prepare your return, as it contains important information.
The form looks rather simple for a tax form, with a bunch of boxes for you to fill in. Box 1a will total the ordinary dividends you received from the institution that sent the form. (Remember, you may have several of these forms, and you may need to total some numbers.) Box 1b states how much of your total ordinary dividends is considered "qualified."
Qualified dividends are taxed at the same rate as long-term capital gains, which is 15% for most of us, 0% for those in the 15% tax bracket or a lesser one, and 20% or 23.8% for high earners. Non-qualified ordinary dividends -- you can arrive at those by subtracting the sum in box 1b from the sum in box 1a -- are taxed at your ordinary income tax rate, which is 25% for many of us and can approach 40% for high earners.
What makes a dividend qualified? Well, it will have been paid to you by an American corporation or a corporation that's either based in a country that has a tax treaty with the U.S. or has its shares trading on a U.S. stock exchange. There are also a few other requirements -- namely, you must have owned the stock for more than 60 days.
In box 2a, you'll see any capital gain distribution you received, typically from a mutual fund. This is treated as a long-term capital gain, and it's taxed accordingly. That's beneficial, because short-term capital gains are taxed at your ordinary income tax rate. Other boxes detail any federal income tax withheld, foreign taxes paid, and/or foreign-source income.
Note that you won't get 1099 DIV forms for your tax-advantaged retirement accounts such as IRAs, because those accounts don't generate tax reporting. You aren't taxed on dividends and capital gains you receive each year on holdings in such accounts.
Though you don't have to file the 1099 DIV form with the IRS, the 1099 DIV form(s) you receive may require you to prepare and file a Schedule B with your return. That's the case if all your ordinary dividends listed in all the 1a boxes on your 1099 DIV form(s) total more than $1,500 -- or if you have more than $1,500 in interest income. This shouldn't be a big problem, though, as Schedule B mainly just wants you to list the ordinary dividends and/or interest you received from various payers.
Form 1099 DIV is one of the simpler tax forms taxpayers have to deal with, but you nevertheless need to have a solid understanding of its role in your finances.