That really depends on the dividends that you are talking about. The annual 1099-DIV form that your company will send you shows how much you received in dividend payments, even if it all went to buy more stock. Report all dividends as income on your annual tax return. The dividends are treated as ordinary income and will be taxed at your marginal tax rate. Pretty simple. It’s much like reporting interest from a savings account — a one line entry. You report the dividends you receive on Schedule B, which is used to record interest and dividend income, but only if you receive more than $400 worth in one year. Otherwise, you simply report dividend income on your main 1040 tax form.
Sometimes capital gains can appear where you least expect them, like on a dividend statement related to a stock or mutual fund that you own. It’s good to look closely at the 1099-DIV forms you receive to see if they say anything like “Capital Gains Distribution” on them.
Most stock dividends are treated as normal, or ordinary, dividends and don’t count as capital gains — and should be reported directly on Schedule B. If your portfolio is pretty much all stocks and no mutual fund shares, this section is unlikely to apply to you. But let’s review it, just in case.
If you see a “Capital Gains Distribution” mention on a 1099-DIV statement that you receive, report those distributions directly on Schedule D. Just a few years ago, those distributions were required to first be reported on Schedule B (Interest and Dividends). But no longer. Take your capital gains distributions directly to Schedule D (Capital Gains and Losses).
Be aware that some companies don’t send you the form 1099-DIV when the dividend payments that you received for the year amounted to less than $10. The dividends are still taxable, however. Your year-end account statement will show the total amount of dividends that you received. You should report that number as income, just as if you’d received a 1099-DIV.
If you reinvest your dividends, either in mutual funds or dividend reinvestment plans, things are just a little bit trickier. You still pay tax on the dividends that are distributed to you, and the shares purchased with dividends are accounted for exactly as if you had bought them with money sitting in your bank account. So you must keep the statements showing your cost basis on dividend reinvestment-acquired shares just as you do when you make optional cash payments to buy shares. When it comes time to sell, you need to know the cost basis for all of your shares — those bought with reinvested dividends and those bought separately with your hard-earned money.
Finally, one brief word about credit union “dividends”: Be careful if you receive a statement of “dividends” paid to you by your credit union. What some credit unions call dividend income is really interest. So even if it says dividend, treat it as interest and include it with interest income.
Money market mutual funds may be a little confusing, as they can generate both interest income and dividend income. You’ll need to pay attention to the statements they send you. Income reported to you on a 1099-INT is interest income and on a 1099-DIV is dividend income.