Key Takeaways

If you have dividend income over $10, you’ll need to complete 1099 forms

Determine if your holding requirements are eligible for the ordinary or qualified tax rate

Reallocations and spillovers may affect the timing of your dividend tax forms

You’ve worked all year to get your long-term portfolio just right by researching yields and allocating your funds. Now it’s the end of the year and you’re ready to sit back and watch your master plan pay dividends—literally. But there’s one more thing you have to do before closing your books: You have to give Uncle Sam his cut.

If you’re a U.S. taxpayer with at least $10 in dividend income, you’ll receive a TD Ameritrade form 1099-DIV, along with a Consolidated 1099 form. The document should arrive by February 15, 2019, depending on your trading activity and the dividend issuer’s tendency to reallocate (we’ll get into that later). Learn more about broker deadlines.

In a perfect world, completing your taxes would be easy and all of your dividends would match your monthly statements. Unfortunately, doing your taxes isn’t always that easy—and there are a few common pitfalls you need to understand before submitting your tax returns.

Dividend Classification

You might see terms like “ordinary,” “qualified,” and “non-qualified” on your form 1099-DIV, depending on the dividend issuer’s designation. These terms are there for a reason. Dividends are considered ordinary dividends; however, not all dividends are eligible for a qualified tax rate.

It’s important to note that not only does the issuer need to classify the dividend as qualified; you’d also need to meet the holding requirements set by the IRS to be eligible to claim the qualified rate.

Taxpayers often believe that they’re the victims of duplicate reporting when the figures in Line 1a (ordinary dividends) and 1b (qualified dividends) on the form 1099-DIV are the same. They’re not. In this case, if all of your dividends are eligible for the qualified rate, 100% of your ordinary dividends would also be reported as qualified dividends.

FIGURE 1: ORDINARY DIVIDENDS VERSUS QUALIFIED DIVIDENDS. Not all ordinary dividends are eligible for a qualified rate. Dividend classification is determined by the dividend issuer, however, other criteria—recipient holding period, for example—must also be considered. For illustrative purposes only.

This can happen for a number of reasons, like if a fund you’re invested in passes through their long-term and short-term capital gains when assets are bought and sold at a profit. As far as credits to your account go, this will look like any other dividend. For the purposes of taxation, these are handled differently.

Another item that tends to confuse taxpayers is the return of capital (ROC) or “non-dividend distribution” variety of payment. These distributions are non-taxable in the sense that they are not included in your dividend income, but they’ll be used as a cost basis adjustment against the underlying asset.

Let’s say you paid $10,000 for a security, and that security makes a payment of $500. Later that year, the issuer gives notice that this payment will be classified as return of capital for taxation purposes. Instead of claiming that payment as income, the payment amount is used to decrease your cost, adjusting your tax basis for this security to $9,500. In this scenario, the tax burden is deferred until the sale or other disposition of the security (whenever that may be), not when the payment is received like ordinary dividends.

FIGURE 2: DIVIDENDS AND DISTRIBUTIONS DETAILED. Details for each reportable item are categorized by issuer and date. A single payment may be broken into multiple tax classifications. For illustrative purposes only.

Other financial buzzwords you might see on the 1099-DIV include cash and non-cash liquidation distributions, investment expenses, and foreign tax withheld. It is important to read—and understand—the documentation provided by the issuer to understand what these terms mean and why they are being passed along to you.

Income Reallocation

Ever wonder why your broker doesn’t issue a tax form on January 1, or even by January 31? It’s often because of income reallocation.

Let’s say all year, your dividends were credited to your account as qualified dividends. So, imagine your surprise when you receive a form 1099-DIV and that same $200 dividend is now 50% qualified and 50% non-qualified. What happened? Many times, the dividend issuers don’t get together to finalize their dividend classification until January or February of the next year, sometimes even later.

Why would your brokers issue you a form on January 15 when they know that a dividend-issuing company in which you hold stock routinely reallocates on January 31? This type of change is common, and is a large contributor to the perceived delay in receiving your form. Issuers actually have up to three years to reallocate their payments. Learn more information about corrected forms here.

Spillover Dividends

Another frequent source of confusion is when a dividend you received from your mutual fund or Real Estate Investment Trust (REIT) in January shows up on your prior year’s form. For example, owners of record holding security XYZ as of December 20, 2018, who get a dividend credited to their account on January 15, 2019, shouldn’t have to pay taxes on that income until 2019, right? Unfortunately, no. This type of dividend is called a spillover dividend because the issuer is using the declaration date, not the pay date, as a point of reference for tax reporting purposes. In effect, the payment falls into next year’s statement, but is very much taxable for the prior year. This is one of many reasons we don’t suggest doing your taxes before you receive your form 1099-DIV.

Are Stock Dividends Taxable? 

Periodically, you’ll see an entry on your form 1099-DIV that doesn’t match up with any cash credited to the account. Before you call your broker, take a look at any new stock credited on or around that date within your monthly statement. Many times, the value you’re seeing is equal to the fair market value of the stock that you received from that issuer.

It is often difficult to anticipate an issuer’s tax classification for dividends prior to their final say. Historical reporting gives us an idea what issuers are likely to report; however, it would be impossible for your broker to guarantee that a security has completed reallocation. Our vendors and in-house data analytics do everything they can to avoid inaccuracies and unnecessary form corrections. That said, the better you understand your Consolidated form, the better prepared you can be to finish your tax year off strong.

TD Ameritrade does not provide tax advice. We suggest that you seek the advice of a qualified tax-planning professional with regard to your personal circumstances.

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