Investors with taxable accounts have a bigger pile of tax forms to deal with every year. Form 1099-DIV is one form you get when your investments pay out dividends and distributions. If you’re like me, it means you spend a little more quality time with tax software each year. Or, maybe you pass it off to your accountant. But do you really understand what is reported in each box of a 1099-DIV? Do you know how it affects your taxes or your investments?
Unfortunately, not all dividends and distributions are taxed the same. And it’s not always easy to figure out. I use TurboTax for help when I get stuck. Regardless, you should still understand what is reported on the 1099-DIV, the tax consequences of each box, and how it might affect your investments. In turn, it might even help you build a more tax efficient investment strategy and lower your taxes in the long run.
Form 1099-DIV
The Form 1099-DIV is issued by banks, brokers, and fund companies when you earn at least $10 in dividends and distribution. You could also get one if you had federal or foreign taxes withheld.
When you receive a 1099-DIV, it looks like the image below. Some boxes will be blank. That’s okay – there was simply nothing to report. There’s a chance you could get a consolidated 1099. In which case, the information on the 1099-DIV will be listed together with other 1099 forms.
On the left is the payer’s information and your personal information. It’s self-explanatory with the payer’s and your name, address, tax payer ID number, or social security number.
On the right, are 18 boxes of important tax information. Some are easy to figure out. Others take a little more effort to understand.
Box 1a – b
Box 1a reports the total ordinary dividends that were paid. These are taxed at your federal income tax rate. This includes short-term capital gains paid by mutual funds and dividends paid by money market funds.
Box 1b shows the qualified dividends. This is the portion of ordinary dividends that qualify for the lower long-term capital gains rate. To do so, it must meet the qualified dividend requirements. In essence, qualified dividends need to be separated from the total ordinary dividends before you can figure out the taxes on each.
For example, if Box 1a reports $1,000 but Box 1b reports $700, the $700 in qualified dividends would be taxed at the lower long-term capital gains rate while the remaining $300 in ordinary dividends ($1,000 – $700 gets you $300) is taxed at your income tax rate.
Box 2a – d
The next four boxes show capital gains distributions from mutual funds, REITs, collectibles, and small businesses.
Box 2a shows the total capital gain distributions paid out. This is typical of mutual funds, and to a lesser degree index funds, as managers sell long-term holdings for a profit. These are considered long-term capital gains and taxed at the long-term rates.
Box 2b reports unrecaptured Section 1250 gains from real estate or REIT transactions. Depreciation is an accounting method used to deduct the cost of an asset from income, like real estate, over a certain period of time. When that asset is sold, a portion of the gains will offset some or all of that earlier depreciation. Because of this, the amount in Box 2b is taxed at a higher capital gains rate, up to a maximum of 25%.
Box 2c shows Section 1202 gains from the sale of qualified small business stock. You won’t see this unless you sell a small business. In which case, your CPA and lawyer already explained the tax benefits to you.
Box 2d reports the capital gain on collectibles which are taxed at a maximum 28% tax rate. This includes art, antiques, coins, stamps, gems, gold, and other metals. Reported gains from gold ETFs, like the GLD, will be found here too.
Box 3
Here you’ll find all nondividend distributions. You’ll see this with mutual funds, REITs, and MLPs. This is a return of capital used to adjust your initial cost in an investment.
For example, if you bought 100 shares of XYZ fund at $10/share. That $10/share is your initial cost basis. The form 1099-DIV shows up in the mail with $100 in Box 3. Instead of paying taxes on that $100 now, it goes against the initial cost of the shares. In other words it lowers the initial cost basis by that amount. The cost basis drops by $1/share ($100 divided by 100 shares = $1/share). Your new cost basis becomes $9/share ($10/share – $1/share).
For tax purposes you won’t have to report this unless the amount in Box 3 is more than the initial cost basis. Find out more about cost basis.
Box 4 – 7
These four boxes cover withheld federal and foreign taxes along with investment expenses.
Box 4 lists any federal income tax withheld from dividends and distributions reported on your 1099-DIV. Any amount listed will reduce your tax owed or increase your refund.
Box 5 covers investment expenses which can be used to offset gains.
Box 6 reports any foreign tax paid on dividends and distributions with Box 7 showing the name of the country. Most foreign taxes can be deducted from the taxes you owe or credited in the case of a refund.
Box 8 – 9
Box 8 is the amount you get from a cash liquidation distribution. There are times when companies are liquidated and the proceeds are distributed as cash to shareholders. This is similar to a nondividend distribution in that it’s a return of capital. Your initial investment is being returned because of the liquidation. You will only pay taxes on the amount over your initial investment.
Box 9 reports noncash liquidation distributions. Unlike cash liquidation, noncash liquidation mean shareholders are paid in stuff, rather than cash. In this case, the fair market value of the items will be in Box 9.
Box 10 – 11
Box 10 is the total amount of exempt-interest dividends paid by mutual funds. As the name implies these are exempt from taxes.
Box 11 is the portion of Box 10 that qualifies as specified private activity bond interest dividends, which shows the amount subject to the Alternative Minimum Tax.
Box 12 – 14
The last three boxes simply deal with State income tax information.
Box 12 shows the State and the payer’s State ID number is listed in Box 13. Finally, Box 14 tells you the amount of state income tax that was withheld.
