Your answer is that a nondividend distribution (one, or three, it doesn't matter) actually won't affect your taxes at all this year; but it may be applicable to calculating your taxes in a future year. Please allow
me to explain this, in detail.
You won't report your non-divided 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 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 non-dividend 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
(non-dividend 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 non-dividend 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.
