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Where does 1099 Box 3 nondividend distributions show on my Form 1040?

 
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Level 1

Where does 1099 Box 3 nondividend distributions show on my Form 1040?

The answer to your question is that a nondividend distribution (one, or more, it doesn't matter) actually won't affect your taxes at all this year and won't directly appear anyplace on your tax return (Form 1040 or elsewhere).  However, nondividend distributions may be applicable to calculating your taxes in a future year, and thus are still an important item.  Please allow me to explain this, in detail.

You won't report your nondivided distribution to the IRS, and so it doesn't get entered on any line of your real tax return for this year.  There is, of course, a box (number 3 on Form 1099-DIV) for you to input the nondividend amount in TurboTax, just as there is in all comparable tax software programs -- but the input field is simply there as a matter of completeness (so the software screen matches the 1099-DIV document you receive from your financial institution). 

A nondividend distribution is just another way of saying "return of capital."  It is meant for your information only, and that of your brokerage or financial firm.  A non-dividend distribution, you see, is a return of some portion of your original investment; and as such you would need to reduce the cost basis of your stock, bond, mutual fund, other security, etc. as a result of the distribution.  While it doesn't matter in the current tax period, this cost basis adjustment does matter in future tax periods, because it is the difference between basis and net proceeds on which capital gains taxes are applied.  Perhaps a numerical example will be illustrative.

Let's say you buy a single share of stock at $100.  That's your original cost basis.  Then, one day your company issues you a non-dividend distribution of $20.  Your stock's adjusted basis is now $100 - $20 = $80.  When you later sell your share of stock to an unrelated third-party for $110, your taxable capital gain is now $30 (the difference between $110 and $80), and not $10 (the difference between $110 and $100).  Does that make sense?

The IRS instructions for Form 1099-DIV Box 3, found on Page 5, will tell you much the same thing:

https://www.irs.gov/pub/irs-access/f1099div_accessible.pdf


Another way of looking at it is you have simply been given back part of your original investment.  If you were to receive a 1099-DIV statement, with an amount printed in Box 3 (nondividend distribution), then you could certainly type that number into the TurboTax data entry screen for the 1099-DIV tax form . . . but it won't actually do anything.  Truthfully, the Box 3 entry field only exists to "match" the boxes that a taxpayer has on their own 1099-DIV document.  By having an entry field there it not only reassures customers that the software is accurately capturing all of their tax information, but it helps avoid data entry mistakes (improves accuracy) by not asking people to "skip" a box on their tax document.  That is the whole purpose, not only in TurboTax, but in all the other competing tax preparation programs.

However, the important thing to note about a nondividend distribution, and something that does require action, is that of the taxpayer's own recordkeeping.  If you have a brokerage firm holding this asset, it is likely that they will adjust the cost basis for you in their records (and thus in yours too).  But if you hold this asset on your own, outside of any financial institution, then you'll need to adjust your own basis and own records.

What you will not have to do, however, is to either enter or disclose this item anywhere on your tax return, either federal or state (if applicable).

Thank you for asking this important question.