4.11 Distribution Not Out of Earnings: Return of Capital

A return of capital or “nontaxable distribution” reduces the cost basis of the stock. If your shares were purchased at different times, reduce the basis of the oldest shares first. When the cost basis is reduced to zero, further returns of capital are taxed as capital gains on Schedule D. Whether the gain is short term or long term depends on the length of time you have held the stock. The company paying the dividend will usually inform you of the tax treatment of the payment.

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image Filing Tip
Insurance Premium Refund
Dividends on insurance policies are actually returns of premiums you previously paid. They are not subject to tax until they exceed the net premiums paid for the contract.
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Life insurance dividends.

Dividends on insurance policies are not true dividends. They are returns of premiums you previously paid. They reduce the cost of the policy and are not subject to tax until they exceed the net premiums paid for the contract. Interest paid or credited on dividends left with the insurance company is taxable. Dividends on VA insurance are tax free, as is interest on dividends left with the VA.

Where insurance premiums were deducted as a business expense in prior years, receipts of insurance dividends are included as business income. Dividends on capital stock of an insurance company ...

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