Q: I completed my taxes and

. . . now I receive a note . . . that one of my companies [whose shares I sold] in March of 2007, . . . changed the dividend that they sent me — from a qualifying dividend to not a dividend at all, but a return of capital. I am told I must lower my cost [basis] and increase my profit by the same amount.

— F.A.,

Cranston

A: Before you sold your stock last year, you received a cash dividend.

So when it came time to prepare your federal income-tax return this season, you had some work to do.

First, you had to account for the dividend you received. You also had to account for the sale of the stock.

Then came this wrinkle: You received a follow-up notice, an amended Form 1099, which said that the dividend you received was actually a nontaxable return of capital to you.

What to do? You must complete and file an amended return on U.S. Form 1040X.

Patricia A. Thompson, former president of the Rhode Island Society of Certified Public Accountants, offered the following guidance:

•You originally treated the dividend as a “qualifying dividend” on the front of your U.S. Form 1040. In other words, the dividend qualified for favorable tax treatment — but it was taxed.

On your Form 1040X, reduce the amount of your taxable dividends by the amount of the “return of capital” listed in the most recent notice you received from the utility (or from your brokerage). That way, you won’t end up paying tax on that distribution.

•When you sell stock, you generally need two key figures: the amount you paid for it (known as your basis, cost basis or tax basis), and the amount at which you sold it.

The difference is your profit (or loss) for tax purposes.

But because you received a return of capital, you must now refigure the gain (or loss) on the sale of your stock.

How? Reduce your basis in the shares you sold by the amount listed in the most recent “return of capital” notice you received.

When you’ve completed these steps, you’ll probably wind up in the same position, from a tax standpoint, that you were before, Thompson said in an interview at Piccerelli Gilstein & Co. LLP, a CPA firm in Providence, where she is tax partner.

In other words, it should be a wash, she said. You’ll have less in dividend income that’ll be subject to tax, but more in capital gains tax on the sale of the stock. (Odds are that the same tax rate applies to both, assuming you held the stock for more than a year before selling.)

It’s not uncommon to receive an amended Form 1099 from a brokerage during tax-filing season, Thompson said. That’s one reason some people wait until late in the season to file their returns.

If you receive such a notice, but have already filed your return, should you file an amended return? In general, the answer is yes.

One reason is that the Internal Revenue Service uses a computerized document-matching system to check on the accuracy of returns filed.

So you could wind up receiving a notice from the IRS eventually, asking you to account for the recent notice you received. (Depending on the circumstances, some people could wind up owing additional tax, plus interest and penalty, if they don’t file the amended return.)

So, rather than run afoul of that system, you should file an amended federal return (and state return), Thompson said.

TODAY’S TIP: By mid-April, the Rhode Island Department of Elderly Affairs will move to another location within the Pastore Complex off Pontiac Avenue in Cranston.

Effective April 14, its new site will be on the second floor at the Hazard Building No. 74, West Road, Cranston. The agency will continue to operate from 8:30 a.m. to 4 p.m. business days, and will maintain its current phone lines, including the main line, (401) 462-3000.

Questions about your money matters? Call us at 1-401-277-7484 and leave a message, or e-mail:

moneyline@projo.com

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