Decoding Form 1099-DIV: Your Guide to Investment Income

Form 1099-DIV is an IRS tax form that investment fund companies must use to report the income the investors earned from dividends (both ordinary and qualified) and capital gains distributions. Once the forms are filled out, copies of the forms are sent to the investors. They must then use that information to fill out their income tax forms. The forms will not be sent if the investors earn $10 or less per fund/distribution. In order to avoid trouble with the IRS, the investors must be able to read and understand their 1099-DIV forms, something this document aims to help with.

Ordinary Dividends

For tax purposes, this category includes profits earned from dividends from money market funds, short-term capital gains from mutual funds, reinvested dividends and section 404(k) dividends paid directly from the corporation. This includes ordinary dividends paid by foreign corporations. The investment fund companies add up all the numbers and print the total in Box 1a.

Qualified Dividends

Qualified dividends are any of the above dividends that qualify for up to a 15 percent capital gains rate. The totals are added up and printed in Box 1b. In addition to writing that total on their form 1040, the investors will need to fill out Schedule D (Qualified Dividends and Capital Gain Tax Worksheet) to calculate whether they must pay additional tax on qualified dividends.

Capital Gain Distributions

The capital gains distributions are the capital gains from investment portfolios' trading activities during each given tax year. These are long-term gains--the shorter-term gains are ordinary dividends. The investment fund companies tally each investor's capital gains distribution and print it in Box 2a.

The portion of the gains generated through the sale of depreciated real estate (real estate that was sold at a price significantly lower than its original purchase price) is printed in Box 2b. This is known as the Unrecaptured Section 1250 Gain.

The investors will have to use the above information to fill out their 1040 forms, but depending on their circumstances, they may do it in one of two ways. If they earned only capital gains from capital gains distributions, and if they didn't earn any Unrecaptured Section 1250 Gain, they can report their profits using the Qualified Dividends and Capital Gain Tax Worksheet, which is included in Form 1040 instructions. Otherwise, the investors will have to use Schedule D to calculate how much they will be taxed on their capital gain distributions.

Non-dividend Distributions

Non-dividend distributions are dividends that don't represent earnings. Essentially, they are supposed to represent portions of the money that the investors invested in mutual funds. They are not listed on Form 1099-DIV unless their value exceeds the value of the mutual funds. If they are reported, the total value of the non-dividend distributions is printed in Box 3.

Taxes Withheld Information

Finally, 1099-DIV forms list the taxes withheld. These include federal and foreign taxes (if any) that the investment fund companies paid as part of their tax obligations. This information is listed in Boxes 4, 6 and 7. The investors can potentially get the refund for the federal tax withheld, but getting a refund from a foreign country is complicated and depends entirely on the laws of the country in question.