Posted by Larry Hurt

Understanding Nominee Dividends

Understanding Nominee Dividends

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.

What is a Holder of Record?

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”. 

  • Registered form- this means he or she will receive the mailed out payments by the issuing firm who also keeps the records of a security’s owner.
  • Bearer form- this means that the physical possession of the security is the sole evidence of ownership. The security is therefore not traded without any record of ownership. Since bearer form securities have the potential for misuse, they have largely been phased out. Securities in the present are typically issued in registered form.

The following scenarios will give you an idea where this might occur and how you’re going to deal with them:

  • John created an investment account for her child and he received Form 1099-DIV that shows his dividends. John no longer has to report the income if the form has his child’s Social Security number and the amount of the investment income is less than $1,050. However, John will be required to report this nominee income on his return if the Form 1099-DIV has his Social Security number on it. 
  • A brokerage account has been opened and a dividend-paying stock in that account has been purchased by 2 siblings - a brother and a sister. As the holder of record and being the first on the account being listed, the sister will be reported by the brokerage firm to the IRS about receiving the entire dividend during the tax year. The IRS will only hold her responsible for the portion of the dividends she actually kept if she files form 1099-DIV since she actually shared the dividend with her brother. A copy of the 1099-DIV showing the portion of the dividend placed as his name as a nominee, and that he received and is responsible for paying tax on will be sent to the brother.

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.

What Exactly is Form 1099-DIV?

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.

Larry Hurt
Contact Member