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June 14, 2017 • H&R Block
Dividends are a share of corporate or mutual fund profits paid out to shareholders. While most dividend distributions are taxable (some at lower rates than others), sometimes a portion of a distribution to shareholders is a nontaxable return of capital. These are also called nondividend distributions.
What are Nontaxable Distributions
Nontaxable distributions are payments that are a return of capital. This means that the shareholder’s original investment is being returned to the shareholder. These payments are not paid from the corporation’s earnings and profits. These distributions reduce your basis in the stock or mutual fund and aren’t taxed until the investor’s basis is reduced to zero.
Form 1099-DIV Box 3
You can find your nontaxable distributions on Form 1099-DIV, Box 3. They’re uncommon.
How to Calculate Nondividend Distributions
Reduce your basis in your investment by the amount of your nontaxable distribution. Once you recover your full basis, report distributions as capital gains. To learn more, see Publication 550: Investment Income and Expenses at www.irs.gov.
More Help with Taxes on Investment Income
Investment income poses special considerations come tax time, including special filing requirements and tax. Whether youmake an appointmentwith one of our knowledgeable tax pros or choose one of ouronline tax filingproducts, you can count on H&R Block to help you get back the most money possible.
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Now, let's delve into the concepts covered in the provided article:
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Dividends:
- Dividends are payments made by corporations or mutual funds to their shareholders.
- They represent a share of the profits earned by the company or fund.
- Most dividend distributions are taxable, and the tax rates can vary.
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Nontaxable Distributions:
- Nontaxable distributions are a subset of dividends that represent a return of capital to shareholders.
- Unlike regular dividends, these distributions are not paid from the company's earnings and profits.
- The purpose is to return the original investment to shareholders.
- Such distributions reduce the shareholder's basis in the stock or mutual fund.
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Form 1099-DIV Box 3:
- Nontaxable distributions can be found on Form 1099-DIV, Box 3.
- Box 3 specifically highlights the amount of nontaxable distributions.
- These distributions are relatively uncommon, as not all dividend payments fall into this category.
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Calculation of Nondividend Distributions:
- To calculate nondividend distributions, reduce the basis in your investment by the amount of the nontaxable distribution.
- The basis is the original investment made by the shareholder.
- Once the basis is fully recovered, any further distributions are reported as capital gains.
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Taxation and Reporting:
- Nontaxable distributions are not immediately taxed; taxation occurs when the investor's basis is reduced to zero.
- Capital gains resulting from distributions are reported as part of the investor's taxable income.
- For additional guidance on investment income and expenses, investors are directed to refer to Publication 550 on the IRS website.
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H&R Block Services:
- The article concludes by mentioning H&R Block's expertise in helping individuals with their taxes, especially regarding investment income.
- The company offers in-person appointments with knowledgeable tax professionals and online tax filing products.
For those seeking more information on the topics covered in the article, consulting IRS resources, such as Publication 550, is recommended for a deeper understanding of investment income and tax implications.
