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The state of Alaska since 1982 has distributed a share of the state’s oil revenues to the state’s residents in the form of an annual dividend check from the Alaska Permanent Fund. In 2012 the state distributed $567.3 million to 646,800 Alaskan adults and children, each of whom received a Permanent Fund dividend payment of $848. Alaskans must file annually for their PFD payment. The PFD payments are not taxed by Alaska but are subject to federal income tax.
Not Investment Income
Although Alaska calls the PFD payments a dividend, the Internal Revenue Service does not consider these payments to be investment dividend income. Instead, they are taxed as ordinary income and reported to recipients on a Form 1099-MISC rather than the 1099-DIV used for dividends from mutual funds and other investments. Each adult and child in the household gets a separate PFD payment, so for example a family of four in 2012 got a total of $3,392.
Taxpayers report the PFD payments as “other income” on Line 21 of Form 1040, Line 13 of Form 1040A or Line 3 of Form 1040EZ. The PFD payments are added to your other ordinary income from work and other sources. The federal income tax rate applied to a PFD payment will depend on your total income from all sources.
Tax on Children
Dependent children who receive a PFD payment may owe income tax. If the child’s PFD payment and all other income paid to the child in 2012 totaled less than $1,900, the child won’t owe any tax. But if the child’s total income exceeds $900, parents must report the income on the child's behalf. If the dependent child had income between $1,900 and $9,000, he owes tax at the parent’s tax rate on the amount over $1,900. If the child owes tax, parents can either file a separate return for the child or report the child’s income on Form 8841 and add it to their own taxable income. Parents can choose the filing method for their child that produces the lowest tax.
Alaskans can avoid federal tax on PFD payments if they donate the money to charity and itemize deductions on their federal tax returns. They can make their donation of PFD funds directly to their charity of choice. Or they can donate through a state program where a resident can direct the state to send his PFD payment to a charity on the state’s list of organizations that provide charitable services to Alaskans. Those planning to use this program must file for the PFD payment online and designate which charity gets the money. Donors will get an official receipt for their donation. Donors must still report their PFD payment as taxable income but can offset the PFD income by taking a deduction for their PFD charitable donation.
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