What is Spillover Dividend
A spillover dividend is a dividend that is announced in one year, but counted as part of another year's income for federal tax purposes. This often happens when a dividend is announced near the end of the calendar year. A company might state in December 2010, for instance, that shareholders of record will receive a dividend; but the actual payment of the dividend might not occur until January 2011, or some time during the first quarter of 2011. In these cases, the dividend would count as taxable income in the year that it was declared, not the year in which it was paid.
Breaking Down Spillover Dividend
A spillover dividend might “spill over” into the next year in terms of payment to shareholders; but in terms of taxes, that liability would remain in the year that the dividend was announced. For example, ABC Corporation declares that shareholders of record on December 15, 2010, are entitled to receive a $2 dividend on each share of ABC stock that they own, with a payment date of January 4, 2011. For Internal Revenue Service purposes, the shareholders would need to include the $2-per-share dividend when they file their annual tax return for 2010.
Why Might a Spillover Dividend Occur?
The process of setting and paying dividends is subject not only to a corporation's discretion, but also to the rules of the respective stock exchange on which the stock is listed. There are four important dates relative to dividends: 1) declaration (or announcement) date, 2) ex-dividend date (ex-date), 3) record (or holders of record) date, and 4) payment (or payable) date. The table below depicts the flow of a dividend from announcement to payment. Because the actual payment date may be set as long as one month after the ex-date, dividends that are announced late in the calendar year may be paid in January (or later in the first quarter) of the following year.
Exceptions to Spillover Dividend Tax Rules
For other types of entities, however, the tax rules for spillover dividends are more complicated. For registered investment companies (RICs) — such as, mutual funds or real estate investment trusts (REITs); or companies that are taxed like them, such as business development companies (BDCs) — United States law says that spillover dividends must be declared by the 15th day of the ninth month after the end of the taxable year. Also, shareholders are usually taxed on dividends in the year when the actual payment of these dividends takes place. The due date for a RIC to file its tax return is the 15th day of the third month in the next financial year. A company may obtain an automatic six-month filing extension if its Form-7004 is filed before the tax return's due date. Because RICs usually do make use of the six-month extension, it means that effectively RICs have the option to declare spillover dividends as taxable income by nine-and-a-half months after the present taxable year.
[For a comprehensive overview of stock dividends, please see our six-part series, Introduction to Dividends.]