DEFINITION of 'Nominee Dividend'
A dividend that a person receives on behalf of someone else. If you receive a nominee dividend, you are responsible for paying income tax on it unless you pass the dividend on to its rightful owner. If you pass the dividend on, you must notify the IRS of the transfer in order to remove your obligation to pay taxes on it. The recipient of a nominee dividend should use IRS form 1099-DIV to notify both the IRS and the dividend recipient that the dividend income has been transferred. Filing this form allows the nominee to adjust his or her taxable income downward by the amount of the transferred dividend payment. The recipient then pays the tax on the dividend he or she received.
BREAKING DOWN 'Nominee Dividend'
Such a situation might arise if a sister and brother opened a brokerage account together and purchased a dividend-paying stock in that account. Because the sister is listed first on the account, the brokerage firm reports to the IRS that she received the entire dividend. Since she actually shared the dividend with her brother, she must file form 1099-DIV so that the IRS will only hold her responsible for the portion of dividends she actually kept. Her brother will receive a copy of the 1099-DIV indicating which portion of the dividend he received and is responsible for paying tax on.