Spillover Dividend

What Is a Spillover Dividend?

A spillover dividend is a dividend that is announced in one year yet counted as part of one more year's income for federal tax purposes. This frequently happens when a dividend is announced close to the furthest limit of the calendar year. A company could state in December 2020, for example, that shareholders of record will receive a dividend. The real payment of the dividend probably won't happen until January or February of 2021. 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.

Spillover dividends quite often apply to regulated investment companies (RICs, for example, real estate investment trusts (REITs), unit investment trusts (UITs), or exchange-traded funds (ETFs).

A spillover dividend may likewise be known as a throwback dividend.

Grasping the Spillover Dividend

A spillover dividend may "spill over" into the next year in terms of payment to shareholders, yet in terms of taxes, that liability would stay in the year that the dividend was announced. For example, ABC Trust, a unit investment trust, declares that shareholders of record on Dec. 15, 2020, are qualified for receive a $2 dividend on each share of ABC Trust units that they own, with a payment date of Jan. 25, 2021. For Internal Revenue Service (IRS) purposes, the shareholders would have to incorporate the $2-per-share dividend when they file their annual tax return for 2020.

For most taxpayers, this isn't an issue, since they have the dividend close by when they pay their taxes for the year.

The Typica Dividend Process

The ordinary course of setting and paying dividends is subject not exclusively to an organization's tact, yet in addition to the rules of the separate stock exchange on which the stock is listed. There are four important dates connected with dividends:

Declaration date or announcement date.
Ex-dividend date.
Record date or holder of record date.
Payment date.

The declaration date is the point at which the dividend is announced. The ex-dividend date means anybody who purchases the stock on or after the ex-dividend date isn't qualified for the declared dividend. The record date is generally the day after the dividend date and is the point at which the company records who gets the dividend. The payment date is the point at which the genuine dividend is paid to eligible shareholders.

On the ex-dividend date, the stock price hypothetically ought to drop by the amount of the dividend, since the company will assign that amount to be distributed to shareholders. For example, on the off chance that a company has declared a $1 dividend, on the ex-dividend day the stock ought to hypothetically open $1 not exactly the prior close. In reality, this doesn't necessarily in every case happen on the grounds that there are various factors that influence the stock price.

Exceptions to Spillover Dividend Tax Rules

For certain types of elements, the tax rules for spillover dividends are more confounded. For registered investment companies (RICs) —, for example, mutual funds or real estate investment trusts (REITs), or companies that are taxed like them, for example, business development companies (BDCs) — United States law says that spillover dividends must be declared by the 15^th day of the 10th month after the finish of the taxable year.

Additionally, shareholders are normally taxed on dividends in the year when the real payment of these dividends happens. The due date for a RIC to file its tax return is the 15^th day of the third month in the next financial year. A qualifying company might get an automatic half year filing extension on the off chance that its Form-7004 is filed before the tax return's due date.

Since RICs normally utilize the half year extension, it means that successfully RICs have the option to declare spillover dividends as taxable income by nine-and-a-half months after the present taxable year.

Example of a Spillover Dividend

At whatever year, a spillover dividend could wind up seeming to be the realistic below.

A RIC declares a dividend in October. The ex-dividend date is set for Dec. 14. Anybody who needs the dividend must claim the stock before the ex-dividend date. Really, ex-dividend means no dividend for individuals buying the stock that day. The record date is for the RIC, and not of much interest to the investor. In this case however, in light of the fact that the dividend is happening close to the furthest limit of the year, the payment date isn't till January.

For tax purposes, the dividend must be remembered for the investor's tax return during the current year, even however they will not really receive the dividend payment until next year.

Features

For certain business substances, the rules around spillover dividends are more complex.
Investors pay taxes on the dividend the year it is announced, not the year they are paid the dividend.
A spillover dividend is announced in one year however paid in another.
Spillover dividends are generally common among regulated investment companies (RICs).