Cash dividends that are paid to someone on behalf of the holder of record are called Nominee dividends. In order to report the nominee income on their own return, the recipient of the nominee dividends is required unless they pass them on to the original owners.
A holder of record refers to the person who is the registered owner of security with the rights, benefits, and responsibilities of ownership. If there are any, shareholder voting rights and dividend payouts are typically given to the holder of record for a stock.
The holder of record for bond, on the other hand, owns the bonds and are given the principal and interest payments. He or she will no longer be the holder of record once the owner sells the security.
The issuance of securities can be in a form of “registered” or “bearer”.
The following scenarios will give you an idea where this might occur and how you’re going to deal with them:
Is it Necessary To Include Your Child’s Nominee Dividends With Ordinary Dividends?
When filing taxes, you should not include the nominee dividends from your child’s account with your ordinary dividends. You’ll have to provide the nominee dividend amount on Form 1040, Schedule B, Line 5 separately from ordinary dividends and write “Nominee Distribution” below the total.
Taxpayers and the IRS receive this form from banks and other financial institutions to report dividends and other distributions. Expect to receive a Form 1099-DIV if you receive $10 or more on dividends. In this form you will find the dividends you received, any taxes withheld, non-dividend distributions, capital gains distributions, investment expenses, and certain other types of gains. Your tax return must include this income and must be reported.
You may have a filing requirement under the Foreign Account Tax Compliance Act (FATCA) if the FATCA box on your Form 1099-DIV is checked so make sure you don’t ignore this box if it’s checked. If you aren’t sure about your foreign income filing requirements, consult a tax professional who’s expert in expat taxes.
A copy of your Form 1099-DIV will also be sent to the IRS. The IRS will likely send a CP2000, Underreported Income notice if you receive a Form 1099-DIV and for not reporting the dividends on your tax return. You will have to deal with an additional tax, penalties, and interest on your dividends and any other unreported income from the IRS.
Consulting a tax professional who's experienced in the area of Nominee Dividend is the best thing to go when you need help to further understand it. The necessary calculations and filling up necessary forms will be taken cared of by the tax professional making your tax report easier than usual.