The amount of a distribution that is taxable depends on the type of distribution received. Amounts paid on accounts with savings and loan associations and credit unions are often called dividends, but the amounts are really interest and should be included with your other interest income. For more information on interest income, see Topic 403 . Ordinary dividends are the most common type of distribution from a corporation. They are paid out of the earnings and profits of the corporation.
All ordinary dividends are fully taxable.
Nontaxable distributions can be made in the form of a return of capital or a tax-free distribution of additional shares of stock or stock rights. A return of capital is a return of some or all of your investment in the stock of the company. What you paid for the stock is your original basis in the stock. If you received the stock as a gift or as an inheritance, your basis may be different. A return of capital reduces the basis of your stock and is not taxed until your basis in the stock is fully recovered.