Stock dividends and stock splits are not taxed when they are earned if the shares are stored in a retirement account. In general, all income earned in a nonretirement brokerage account is taxed in the year it is earned. Dividends, realized capital gains, and interest are all included. Qualified dividends are payments received from after-tax corporate earnings and are taxed at 15% for most shareholders who meet specific income levels. Stock splits are not taxable events, although they do influence a shareholder’s cost basis. Examine the following criteria and fundamental investment tax regulations to determine when and how much tax is required for one of these occurrences.
Dividend payments received on an account are totaled, and the brokerage company mails a Form 1099-DIV to report the amount for each tax year. These payments are taxed whether paid in cash or as dividends reinvested to acquire further shares. Form 1099-DIV separates qualifying dividends from ordinary dividends. Qualified dividends are those paid by US corporations or foreign corporations whose home countries have specific tax arrangements with the US. If the dividends are paid by a foreign corporation that does not have a treaty, the payments are considered regular dividends and are taxed as ordinary income. For example, if a shareholder of ABC, a U.S. firm, earns $250 in dividends for the year, the tax owing (for most taxpayers) is 15%, or $37.50.
Dividends and stock splits are not the same thing since they are not payouts of corporate earnings. When attempting to grasp stock splits or reverse splits, recognize they are only a reorganization of shares outstanding and price per share; no tax is payable. For example, if an investor buys 100 shares of ABC at $80 each, the total cost is $8,000. If the corporation issues a 2-for-1 split, the investor will hold 200 shares at $40 per share, but his total cost will stay the same, resulting in no gain or loss. The stock split impacts solely the cost base per share. If no further investments are made in ABC, calculating the cost basis when the shares are sold is simple. When new purchases are made following a stock split, calculating cost basis may be difficult.
In summary, dividends and other income deposited into a nonretirement account are taxable, but the tax consequences of a stock split are not computed until the stock is sold. When the shares are sold, the investor increases the cost basis to account for the shares that were divided. To learn how dividends and stock splits effect their tax circumstances, investors should consult with their financial advisers and tax specialists. For example, since 2013, eligible dividends have been taxed at a rate of 20% for higher-income individuals.
CFP®, AIF®, Scott Gaynor, KCS Wealth Advisory, LLC, Los Angeles, CA
It is dependent on the kind of account for stock dividends. Stock dividends are not taxable in retirement funds. Qualified dividends are taxed at long-term capital gains rates in a non-retirement account, depending on your tax bracket (federal rates are 0%, 15%, or 20%), but non-qualified dividends are taxed at ordinary income rates, much like normal income. During the 120-day holding period, investors must also retain their shares for more than 60 days. With a few exceptions, most monthly dividends paid by US corporations are eligible.
Stock splits are normally not taxed since the cost basis per share is adjusted to match the new stock structure and price, resulting in the same total market value. You owe no taxes since you did not profit from the stock split.
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