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Taxmap/pubs/p550-006.htm#TXMP2e01b9e2 Dividends and   Other Corporate Distributions

Dividends and Other Corporate Distributions

Dividends are distributions of money, stock, or other property paid to you by a corporation. You also may receive dividends through a partnership, an estate, a trust, or an association that is taxed as a corporation. However, some amounts you receive that are called dividends are actually interest income. (See Dividends that are actually interest under Taxable Interest — General, earlier.)

The most common kinds of distributions are:

• Ordinary dividends,
• Capital gain distributions, and
• Nondividend distributions.

Most distributions are paid in cash (check). However, distributions can consist of more stock, stock rights, other property, or services.

Taxmap/pubs/p550-006.htm#TXMP77dc636f Form 1099-DIV.

Most corporations use Form 1099-DIV, Dividends and Distributions, to show you the distributions you received from them during the year. Keep this form with your records. You do not have to attach it to your tax return.

Taxmap/pubs/p550-006.htm#TXMP063a2d55 Dividends not reported on Form 1099-DIV.

Even if you do not receive Form 1099-DIV, you must still report all of your taxable dividend income. For example, you may receive distributive shares of dividends from partnerships or subchapter S corporations. These dividends are reported to you on Schedule K-1 (Form 1065) and Schedule K-1 (Form 1120S).

Taxmap/pubs/p550-006.htm#TXMP0fc3545f Nominees.

If someone receives distributions as a nominee for you, that person will give you a Form 1099-DIV, which will show distributions received on your behalf.

If you receive a Form 1099-DIV that includes amounts belonging to another person, see Nominees under How To Report Dividend Income, later, for more information.

Taxmap/pubs/p550-006.htm#TXMP6bccdb42 Form 1099-MISC.

Certain substitute payments in lieu of dividends or tax-exempt interest that are received by a broker on your behalf must be reported to you on Form 1099-MISC, Miscellaneous Income, or a similar statement. See also Reporting Substitute Payments under Short Sales in chapter 4.

Taxmap/pubs/p550-006.htm#TXMP50e8f497 Incorrect amount shown on a Form 1099.

If you receive a Form 1099 that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. The new Form 1099 you receive will be marked "Corrected."

Taxmap/pubs/p550-006.htm#TXMP64898841 Dividends on stock sold.

If stock is sold, exchanged, or otherwise disposed of after a dividend is declared, but before it is paid, the owner of record (usually the payee shown on the dividend check) must include the dividend in income.

Taxmap/pubs/p550-006.htm#TXMP059456e8 Dividends received in January.

If a regulated investment company (mutual fund) or real estate investment trust (REIT) declares a dividend (including any exempt-interest dividend or capital gain distribution) in October, November, or December payable to shareholders of record on a date in one of those months but actually pays the dividend during January of the next calendar year, you are considered to have received the dividend on December 31. You report the dividend in the year it was declared.

Taxmap/pubs/p550-006.htm#TXMP2d8a7b11 Ordinary Dividends

Ordinary Dividends

Ordinary (taxable) dividends are the most common type of distribution from a corporation. They are paid out of the earnings and profits of a corporation and are ordinary income to you. This means they are not capital gains. You can assume that any dividend you receive on common or preferred stock is an ordinary dividend unless the paying corporation tells you otherwise. Ordinary dividends will be shown in box 1a of the Form 1099-DIV you receive.

Taxmap/pubs/p550-006.htm#TXMP655f48de Qualified Dividends

Qualified Dividends

Qualified dividends are the ordinary dividends that are subject to the same 5% or 15% maximum tax rate that applies to net capital gain. They should be shown in box 1b of the Form 1099-DIV you receive.

Qualified dividends are subject to the 15% rate if the regular tax rate that would apply is 25% or higher. If the regular tax rate that would apply is lower than 25%, qualified dividends are subject to the 5% rate.

To qualify for the 5% or 15% maximum rate, all of the following requirements must be met.

1. The dividends must have been paid by a U.S. corporation or a qualified foreign corporation. (See Qualified foreign corporation later.)
2. The dividends are not of the type listed later under Dividends that are not qualified dividends.
3. You meet the holding period (discussed next).

Taxmap/pubs/p550-006.htm#TXMP7cbac673 Holding period.

You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock will not receive the next dividend payment. When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it. See the examples, later.

Taxmap/pubs/p550-006.htm#TXMP12a55339 Exception for preferred stock.

In the case of preferred stock, you must have held the stock more than 90 days during the 181-day period that begins 90 days before the ex-dividend date if the dividends are due to periods totaling more than 366 days. If the preferred dividends are due to periods totaling less than 367 days, the holding period in the preceding paragraph applies.

Taxmap/pubs/p550-006.htm#TXMP3ce4ac1d
Example 1.

You bought 5,000 shares of XYZ Corp. common stock on July 1, 2004. XYZ Corp. paid a cash dividend of 10 cents per share. The ex-dividend date was July 9, 2004. Your Form 1099-DIV from XYZ Corp. shows $500 in box 1a (ordinary dividends) and in box 1b (qualified dividends). However, you sold the 5,000 shares on August 4, 2004. You held your shares of XYZ Corp. for only 34 days of the 121-day period (from July 2, 2004, through August 4, 2004). The 121-day period began on May 10, 2004 (60 days before the ex-dividend date), and ended on September 7, 2004. You have no qualified dividends from XYZ Corp. because you did not hold the XYZ stock for more than 60 days.

Taxmap/pubs/p550-006.htm#TXMP5fab62a4
Example 2.

Assume the same facts as in Example 1 except that you bought the stock on July 8, 2004 (the day before the ex-dividend date), and you sold the stock on September 9, 2004. You held the stock for 63 days (from July 9, 2004, through September 9, 2004). The $500 of qualified dividends shown in box 1b of your Form 1099-DIV are all qualified dividends because you held the stock for 61 days of the 121-day period (from July 9, 2004, through September 7, 2004).

Taxmap/pubs/p550-006.htm#TXMP13dbc4e9
Example 3.

You bought 10,000 shares of ABC Mutual Fund common stock on July 1, 2004. ABC Mutual Fund paid a cash dividend of 10 cents per share. The ex-dividend date was July 9, 2004. The ABC Mutual Fund advises you that the portion of the dividend eligible to be treated as qualified dividends equals 2 cents per share. Your Form 1099-DIV from ABC Mutual Fund shows total ordinary dividends of $1,000 and qualified dividends of $200. However, you sold the 10,000 shares on August 4, 2004. You have no qualified dividends from ABC Mutual Fund because you did not hold the ABC Mutual Fund stock for more than 60 days.

Taxmap/pubs/p550-006.htm#TXMP3cf5d1dc Holding period reduced where risk of loss is diminished.

When determining whether you met the minimum holding period discussed earlier, you cannot count any day during which you meet any of the following conditions.

1. You had an option to sell, were under a contractual obligation to sell, or had made (and not closed) a short sale of substantially identical stock or securities.
2. You were grantor (writer) of an option to buy substantially identical stock or securities.
3. Your risk of loss is diminished by holding one or more other positions in substantially similar or related property.

For information about how to apply condition (3), see Regulations section 1.246-5.

Taxmap/pubs/p550-006.htm#TXMP2100d744 Qualified foreign corporation.

A foreign corporation is a qualified foreign corporation if it meets any of the following conditions.

1. The corporation is incorporated in a U.S. possession.
2. The corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the Treasury Department determines is satisfactory for this purpose and that includes an exchange of information program. For a list of those treaties, see Table 1-3.
3. The corporation does not meet (1) or (2) above, but the stock for which the dividend is paid is readily tradable on an established securities market in the United States. See Readily tradable stock, later.

Taxmap/pubs/p550-006.htm#TXMP543314db Exception.

A corporation is not a qualified foreign corporation if it is a foreign personal holding company, foreign investment company, or a passive foreign investment company during its tax year in which the dividends are paid or during its previous tax year.

Taxmap/pubs/p550-006.htm#TXMP13f60562 Controlled foreign corporation (CFC).

Dividends paid out of a CFC's earnings and profits that were not previously taxed are qualified dividends if the CFC is otherwise a qualified foreign corporation and the other requirements in this discussion are met. Certain dividends paid by a CFC that would be treated as a passive foreign investment company but for section 1297(e) of the Internal Revenue Code may be treated as qualified dividends. For more information, see Notice 2004-70, which is on page 724 of Internal Revenue Bulletin 2004-44 at www.irs.gov/pub/irs-irbs/irb04-44.pdf.

Taxmap/pubs/p550-006.htm#TXMP04b697e9 Readily tradable stock.

Any stock (such as common, ordinary, or preferred stock), or an American depositary receipt in respect of that stock, is considered to satisfy requirement (3) if it is listed on one of the following securities markets: the New York Stock Exchange, the NASDAQ Stock Market, the American Stock Exchange, the Boston Stock Exchange, the Cincinnati Stock Exchange, the Chicago Stock Exchange, the Philadelphia Stock Exchange, or the Pacific Exchange, Inc.

Table 1-3. Income Tax Treaties

Income tax treaties that the United States has with the following countries satisfy requirement (2) under Qualified foreign corporation.
Australia	Ireland	Romania
Austria	Israel	Russian
Belgium	Italy	Federation
Canada	Jamaica	Slovak
China	Japan	Republic
Cyprus	Kazakhstan	Slovenia
Czech	Korea	South Africa
Republic	Latvia	Spain
Denmark	Lithuania	Sweden
Egypt	Luxembourg	Switzerland
Estonia	Mexico	Thailand
Finland	Morocco	Trinidad and
France	Netherlands	Tobago
Germany	New Zealand	Tunisia
Greece	Norway	Turkey
Hungary	Pakistan	Ukraine
Iceland	Philippines	United
India	Poland	Kingdom
Indonesia	Portugal	Venezuela

Taxmap/pubs/p550-006.htm#TXMP51b262ae Dividends that are not qualified dividends.

The following dividends are not qualified dividends. They are not qualified dividends even if they are shown in box 1b of Form 1099-DIV.

• Capital gain distributions.
• Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U.S. building and loan associations, U.S. savings and loan associations, federal savings and loan associations, and similar financial institutions. (Report these amounts as interest income.)
• Dividends from a corporation that is a tax-exempt organization or farmer's cooperative during the corporation's tax year in which the dividends were paid or during the corporation's previous tax year.
• Dividends paid by a corporation on employer securities which are held on the date of record by an employee stock ownership plan (ESOP) maintained by that corporation.
• Dividends on any share of stock to the extent that you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property.
• Payments in lieu of dividends, but only if you know or have reason to know that the payments are not qualified dividends.
• Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends.

Taxmap/pubs/p550-006.htm#TXMP28701a9c Dividends Used To Buy More Stock

Dividends Used To Buy More Stock

The corporation in which you own stock may have a dividend reinvestment plan. This plan lets you choose to use your dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. If you are a member of this type of plan and you use your dividends to buy more stock at a price equal to its fair market value, you still must report the dividends as income.

If you are a member of a dividend reinvestment plan that lets you buy more stock at a price less than its fair market value, you must report as dividend income the fair market value of the additional stock on the dividend payment date.

You also must report as dividend income any service charge subtracted from your cash dividends before the dividends are used to buy the additional stock. But you may be able to deduct the service charge. See Expenses of Producing Income in chapter 3.

In some dividend reinvestment plans, you can invest more cash to buy shares of stock at a price less than fair market value. If you choose to do this, you must report as dividend income the difference between the cash you invest and the fair market value of the stock you buy. When figuring this amount, use the fair market value of the stock on the dividend payment date.

Taxmap/pubs/p550-006.htm#TXMP6ecd0472 Money Market Funds

Report amounts you receive from money market funds as dividend income. Money market funds are a type of mutual fund and should not be confused with bank money market accounts that pay interest.

Taxmap/pubs/p550-006.htm#TXMP16174175 Capital Gain Distributions

Capital Gain Distributions

Capital gain distributions (also called capital gain dividends) are paid to you or credited to your account by regulated investment companies (commonly called mutual funds) and real estate investment trusts (REITs). They will be shown in box 2a of the Form 1099-DIV you receive from the mutual fund or REIT.

Report capital gain distributions as long-term capital gains, regardless of how long you owned your shares in the mutual fund or REIT. See Capital gain distributions under How To Report Dividend Income, later in this chapter.

Taxmap/pubs/p550-006.htm#TXMP6327943e Undistributed capital gains of mutual funds and REITs.

Some mutual funds and REITs keep their long-term capital gains and pay tax on them. You must treat your share of these gains as distributions, even though you did not actually receive them. However, they are not included on Form 1099-DIV. Instead, they are reported to you on Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains.

Form 2439 will also show how much, if any, of the undistributed capital gains is:

• Unrecaptured section 1250 gain (box 1b),
• Gain from qualified small business stock (section 1202 gain, box 1c), or
• Collectibles (28%) gain (box 1d).

For information about these terms, see Capital Gain Tax Rates in chapter 4.

Report undistributed capital gains (box 1a of Form 2439) as long-term capital gains on Schedule D (Form 1040), line 11, column (f). Enter on line 11 of the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions the part reported to you as unrecaptured section 1250 gain. For any gain on qualified small business stock, follow the reporting instructions under Section 1202 Exclusion in chapter 4. Enter the collectibles gain on line 1 of the 28% Rate Gain Worksheet in the Schedule D instructions.

The tax paid on these gains by the mutual fund or REIT is shown in box 2 of Form 2439. You take credit for this tax by including it on Form 1040, line 69, and checking box a on that line. Attach Copy B of Form 2439 to your return, and keep Copy C for your records.

Taxmap/pubs/p550-006.htm#TXMP466076e1 Basis adjustment.

Increase your basis in your mutual fund, or your interest in a REIT, by the difference between the gain you report and the credit you claim for the tax paid.

Taxmap/pubs/p550-006.htm#TXMP5caef747 Nondividend Distributions

Nondividend Distributions

A nondividend distribution is a distribution that is not paid out of the earnings and profits of a corporation. You should receive a Form 1099-DIV or other statement from the corporation showing you the nondividend distribution. On Form 1099-DIV, a nondividend distribution will be shown in box 3. If you do not receive such a statement, you report the distribution as an ordinary dividend.

Taxmap/pubs/p550-006.htm#TXMP367f7bd4 Basis adjustment.

A nondividend distribution reduces the basis of your stock. It is not taxed until your basis in the stock is fully recovered. This nontaxable portion is also called a return of capital; it is a return of your investment in the stock of the company. If you buy stock in a corporation in different lots at different times, and you cannot definitely identify the shares subject to the nondividend distribution, reduce the basis of your earliest purchases first.

When the basis of your stock has been reduced to zero, report any additional nondividend distribution that you receive as a capital gain. Whether you report it as a long-term or short-term capital gain depends on how long you have held the stock. See Holding Period in chapter 4.

Taxmap/pubs/p550-006.htm#TXMP7e62e1db
Example.

You bought stock in 1992 for $100. In 1995, you received a nondividend distribution of $80. You did not include this amount in your income, but you reduced the basis of your stock to $20. You received a nondividend distribution of $30 in 2004. The first $20 of this amount reduced your basis to zero. You report the other $10 as a long-term capital gain for 2004. You must report as a long-term capital gain any nondividend distribution you receive on this stock in later years.

Taxmap/pubs/p550-006.htm#TXMP3c376e13 Liquidating Distributions

Liquidating Distributions

Liquidating distributions, sometimes called liquidating dividends, are distributions you receive during a partial or complete liquidation of a corporation. These distributions are, at least in part, one form of a return of capital. They may be paid in one or more installments. You will receive Form 1099-DIV from the corporation showing you the amount of the liquidating distribution in box 8 or 9.

Any liquidating distribution you receive is not taxable to you until you have recovered the basis of your stock. After the basis of your stock has been reduced to zero, you must report the liquidating distribution as a capital gain. Whether you report the gain as a long-term or short-term capital gain depends on how long you have held the stock. See Holding Period in chapter 4.

Taxmap/pubs/p550-006.htm#TXMP599ad76f Stock acquired at different times.

If you acquired stock in the same corporation in more than one transaction, you own more than one block of stock in the corporation. If you receive distributions from the corporation in complete liquidation, you must divide the distribution among the blocks of stock you own in the following proportion: the number of shares in that block over the total number of shares you own. Divide distributions in partial liquidation among that part of the stock that is redeemed in the partial liquidation. After the basis of a block of stock is reduced to zero, you must report the part of any later distribution for that block as a capital gain.

Taxmap/pubs/p550-006.htm#TXMP167f10db Distributions less than basis.

If the total liquidating distributions you receive are less than the basis of your stock, you may have a capital loss. You can report a capital loss only after you have received the final distribution in liquidation that results in the redemption or cancellation of the stock. Whether you report the loss as a long-term or short-term capital loss depends on how long you held the stock. See Holding Period in chapter 4.

Taxmap/pubs/p550-006.htm#TXMP57ce66a3 Distributions of Stock   and Stock Rights

Distributions of Stock and Stock Rights

Distributions by a corporation of its own stock are commonly known as stock dividends. Stock rights (also known as "stock options") are distributions by a corporation of rights to acquire the corporation's stock. Generally, stock dividends and stock rights are not taxable to you, and you do not report them on your return.

Taxmap/pubs/p550-006.htm#TXMP53a0a6ce Taxable stock dividends and stock rights.

Distributions of stock dividends and stock rights are taxable to you if any of the following apply.

1. You or any other shareholder has the choice to receive cash or other property instead of stock or stock rights.
2. The distribution gives cash or other property to some shareholders and an increase in the percentage interest in the corporation's assets or earnings and profits to other shareholders.
3. The distribution is in convertible preferred stock and has the same result as in (2).
4. The distribution gives preferred stock to some common stock shareholders and common stock to other common stock shareholders.
5. The distribution is on preferred stock. (The distribution, however, is not taxable if it is an increase in the conversion ratio of convertible preferred stock made solely to take into account a stock dividend, stock split, or similar event that would otherwise result in reducing the conversion right.)

The term "stock" includes rights to acquire stock, and the term "shareholder" includes a holder of rights or convertible securities.

If you receive taxable stock dividends or stock rights, include their fair market value at the time of the distribution in your income.

Taxmap/pubs/p550-006.htm#TXMP137fd9e1 Constructive distributions.

You must treat certain transactions that increase your proportionate interest in the earnings and profits or assets of a corporation as if they were distributions of stock or stock rights. These constructive distributions are taxable if they have the same result as a distribution described in (2), (3), (4), or (5) of the above discussion.

This treatment applies to a change in your stock's conversion ratio or redemption price, a difference between your stock's redemption price and issue price, a redemption that is not treated as a sale or exchange of your stock, and any other transaction having a similar effect on your interest in the corporation.

Taxmap/pubs/p550-006.htm#TXMP5cf80b08 Preferred stock redeemable at a premium.

If you hold preferred stock having a redemption price higher than its issue price, the difference (the redemption premium) generally is taxable as a constructive distribution of additional stock on the preferred stock.

For stock issued before October 10, 1990, you include the redemption premium in your income ratably over the period during which the stock cannot be redeemed. For stock issued after October 9, 1990, you include the redemption premium on the basis of its economic accrual over the period during which the stock cannot be redeemed, as if it were original issue discount on a debt instrument. See Original Issue Discount (OID), earlier in this chapter.

The redemption premium is not a constructive distribution, and therefore is not taxable, in the following situations.

1. The stock was issued before October 10, 1990 (before December 20, 1995, if redeemable solely at the option of the issuer), and the redemption premium is "reasonable." (For stock issued before October 10, 1990, only the part of the redemption premium that is not "reasonable" is a constructive distribution.) The redemption premium is reasonable if it is not more than 10% of the issue price on stock not redeemable for 5 years from the issue date or is in the nature of a penalty for making a premature redemption.
2. The stock was issued after October 9, 1990 (after December 19, 1995, if redeemable solely at the option of the issuer), and the redemption premium is "de minimis." The redemption premium is de minimis if it is less than one-fourth of 1% (.0025) of the redemption price multiplied by the number of full years from the date of issue to the date redeemable.
3. The stock was issued after October 9, 1990, and must be redeemed at a specified time or is redeemable at your option, but the redemption is unlikely because it is subject to a contingency outside your control (not including the possibility of default, insolvency, etc.).
4. The stock was issued after December 19, 1995, and is redeemable solely at the option of the issuer, but the redemption premium is in the nature of a penalty for premature redemption or redemption is not more likely than not to occur. The redemption will be treated under a "safe harbor" as not more likely than not to occur if all of the following are true.
   1. You and the issuer are not related under the rules discussed in chapter 4 under Losses on Sales or Trades of Property, substituting "20%" for "50%."
   2. There are no plans, arrangements, or agreements that effectively require or are intended to compel the issuer to redeem the stock.
   3. The redemption would not reduce the stock's yield.

Taxmap/pubs/p550-006.htm#TXMP322aa2a3 Basis.

Your basis in stock or stock rights received in a taxable distribution is their fair market value when distributed. If you receive stock or stock rights that are not taxable to you, see Stocks and Bonds under Basis of Investment Property in chapter 4 for information on how to figure their basis.

Taxmap/pubs/p550-006.htm#TXMP3219fb4b Fractional shares.

You may not own enough stock in a corporation to receive a full share of stock if the corporation declares a stock dividend. However, with the approval of the shareholders, the corporation may set up a plan in which fractional shares are not issued, but instead are sold, and the cash proceeds are given to the shareholders. Any cash you receive for fractional shares under such a plan is treated as an amount realized on the sale of the fractional shares. You must determine your gain or loss and report it as a capital gain or loss on Schedule D (Form 1040). Your gain or loss is the difference between the cash you receive and the basis of the fractional shares sold.

Taxmap/pubs/p550-006.htm#TXMP7b764685
Example.

You own one share of common stock that you bought on January 3, 1996, for $100. The corporation declared a common stock dividend of 5% on June 30, 2004. The fair market value of the stock at the time the stock dividend was declared was $200. You were paid $10 for the fractional-share stock dividend under a plan described in the above paragraph. You figure your gain or loss as follows:

Fair market value of old stock	$200.00
Fair market value of stock dividend (cash received)	+ 10.00
Fair market value of old stock and stock dividend	$210.00
Basis (cost) of old stock after the stock dividend (($200 ÷ $210) × $100)	$95.24
Basis (cost) of stock dividend (($10 ÷ $210) × $100)	+ 4.76
Total	$100.00
Cash received	$10.00
Basis (cost) of stock dividend	- 4.76
Gain	$5.24

Because you had held the share of stock for more than 1 year at the time the stock dividend was declared, your gain on the stock dividend is a long-term capital gain.

Taxmap/pubs/p550-006.htm#TXMP01c7f27c Scrip dividends.

A corporation that declares a stock dividend may issue you a scrip certificate that entitles you to a fractional share. The certificate is generally nontaxable when you receive it. If you choose to have the corporation sell the certificate for you and give you the proceeds, your gain or loss is the difference between the proceeds and the part of your basis in the corporation's stock that is allocated to the certificate.

However, if you receive a scrip certificate that you can choose to redeem for cash instead of stock, the certificate is taxable when you receive it. You must include its fair market value in income on the date you receive it.

Taxmap/pubs/p550-006.htm#TXMP3fcd24c8 Other Distributions

Distribution

You may receive any of the following distributions during the year.

Taxmap/pubs/p550-006.htm#TXMP64671644 Exempt-interest dividends.

Exempt-interest dividends you receive from a regulated investment company (mutual fund) are not included in your taxable income. You will receive a notice from the mutual fund telling you the amount of the exempt-interest dividends you received. Exempt-interest dividends are not shown on Form 1099-DIV or Form 1099-INT.

Taxmap/pubs/p550-006.htm#TXMP71c5c18d Information reporting requirement.

Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file a return. This is an information reporting requirement and does not change the exempt-interest dividends to taxable income. See Reporting tax-exempt interest under How To Report Interest Income, earlier.

Taxmap/pubs/p550-006.htm#TXMP6e271acf Alternative minimum tax treatment.

Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. See Form 6251 and its instructions for more information.

Taxmap/pubs/p550-006.htm#TXMP212675a5 Dividends on insurance policies.

Insurance policy dividends that the insurer keeps and uses to pay your premiums are not taxable. However, you must report as taxable interest income the interest that is paid or credited on dividends left with the insurance company.

If dividends on an insurance contract (other than a modified endowment contract) are distributed to you, they are a partial return of the premiums you paid. Do not include them in your gross income until they are more than the total of all net premiums you paid for the contract. (For information on the treatment of a distribution from a modified endowment contract, see Distribution Before Annuity Starting Date From a Nonqualified Plan under Taxation of Nonperiodic Payments in Publication 575, Pension and Annuity Income.) Report any taxable distributions on insurance policies on Form 1040, line 16b, or Form 1040A, line 12b.

Taxmap/pubs/p550-006.htm#TXMP164d7338 Dividends on veterans' insurance.

Dividends you receive on veterans' insurance policies are not taxable. In addition, interest on dividends left with the Department of Veterans Affairs is not taxable.

Taxmap/pubs/p550-006.htm#TXMP3c55ecf6 Patronage dividends.

Generally, patronage dividends you receive in money from a cooperative organization are included in your income.

Do not include in your income patronage dividends you receive on:

1. Property bought for your personal use, or
2. Capital assets or depreciable property bought for use in your business. But you must reduce the basis (cost) of the items bought. If the dividend is more than the adjusted basis of the assets, you must report the excess as income.

These rules are the same whether the cooperative paying the dividend is a taxable or tax-exempt cooperative.

Taxmap/pubs/p550-006.htm#TXMP6c7b093b Alaska Permanent Fund dividends.

Do not report these amounts as dividends. Instead, report these amounts on Form 1040, line 21, Form 1040A, line 13, or Form 1040EZ, line 3.

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