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Understanding Nominee Dividends

Understanding Nominee Dividends

A nominee dividend is an interest recorded on Form 1099-DIV and submitted to the IRS. The form implies that the interest income is from a different account holder. In other words, nominee dividends or cash dividend is the interest paid to a taxpayer account instead of the actual account holder. The taxpayer files the dividend as their taxes to prevent it from being paid to the actual owner. The process is possible in an account belonging to two persons who are not a spouse. 

A partner can decide to withdraw the funds as nominee distribution, or the financial institution can pay the interest earned in the account into one partner’s account. The nominee distribution is to ensure that every partner in a joint account pays tax on the interest. Such interest accrued on the account belongs to the account holder or one of the partners.


Who’s a Nominee?

A nominee is a person given partial authority to represent the actual account owner or entity for a certain period, usually during the account's opening. The IRS considers the responsible party as the principal officer, general partner, etc., given the right to hold the entity's responsibility. 

The responsible party is allowed to control, manage, and direct the entity's affairs and the distribution of the account funds and assets, unlike the nominee, who has limited rights or authority over the account funds and assets.


Understanding Nominee Dividends

Nominee Dividends are when a taxpayer is sent a form 1099-DIV and is to fill it with Schedule B, Ordinary Dividends, and Interest. The whole accumulated interest is to appear on the form. At the bottom, the taxpayers capitalize it as nominee distribution and state the accumulated interest that the actual account holder owns. 

If the taxpayer does not subtract the nominee distribution, they might pay interest on behalf of the actual owner. The joint account owner uses Form 1096 with the initial form 1099-INT to file their interest share and pay tax. Any nominee must file tax returns on 1099 with the IRS and account holder showing their portion of the paid tax. The program can accommodate many members of joint accounts. However, each member must file paperwork with the government and the account owner. 

The Form 1099-DIV 

Form 1099-DIV is the form given to taxpayers or investors to file their dividends and distributions before submitting them to the IRS. The dividend is a share of the fund given to the owner or shareholder as part of the interest or earnings on the joint account. They usually come in cash. 

Sometimes they are paid as property. The funds paid to the investors are taxable since they are considered Qualified Dividends. However, they attract lower capital gains tax rates. Dividends that do not qualify under the group are taxed using ordinary income or regular tax rates.

Here are some scenarios of the process and how to deal with them: 

  • A Form 1099-DIV shows the dividends of a child’s investment account. If you receive this form with your child’s Social Security Number and an amount less than $1,050, you’re safe to keep the income. However, if the form contains your Social Security number, you must remit this nominee’s income as part of your return.

  • If you receive a Form 1099-DIV with dividends showing for a joint account with your sibling and your name is first on the form, you're tax liable. The form will be sent to you, which you'll share with your sibling or partner, and you'll prove this by filing Form 1099-DIV, instating your amount transferred. You are to give your sibling or partner a copy of the form.

Finally, the best way to go about the nominee dividends without the complicated process is to hire a tax professional with experience in the area. The professional will handle the necessary tax calculation and filing to make it easier for both parties.



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