If shares are held in a retirement account, stock dividends and stock splits are not taxed as they are earned. Generally, in a nonretirement brokerage account, any income is taxable in the year it is received. This includes dividends, realized capital gains and interest. Qualified dividends are payments made from business profits after taxes and are taxed at 15% for most shareholders who fall within certain income thresholds. Stock splits are not a taxable event, but they do affect cost basis for a shareholder. To determine when and how much tax is owed for one of these events, look at the following criteria and review basic investing tax rules.
Dividend payments received on an account are tallied and a Form 1099-DIV is mailed by the brokerage firm to report the total for each tax year. These payments are subject to tax whether cash is received or dividends are reinvested to purchase more shares. Form 1099-DIV shows a breakdown for qualified dividends and ordinary dividends. Qualified dividends are those paid by U.S. companies or by foreign companies whose countries of domicile have special tax treaties with the United States. If the dividends are from a foreign company without such a treaty, the payments are called ordinary dividends, which are taxed as ordinary income. For example, if a shareholder of ABC, a U.S. company, receives $250 in dividends for the year, these are classified as qualified dividends, so the tax owed (for most taxpayers) is 15%, or $37.50.
Stock splits are quite different from dividends, as they are not distributions of business profits. When trying to understand stock splits or reverse splits, realize they are merely a restructuring of shares outstanding and price per share; no tax is incurred. For example, an investor owns 100 shares of ABC at $80 per share for a total cost of $8,000. If the company issues a 2-for-1 split, the investor then owns 200 shares at $40 per share but his total cost remains the same, so no gain or loss is incurred. The stock split affects only the cost basis per share. If no further investments are made into ABC, figuring the cost basis when the shares are sold is not difficult. Figuring cost basis can be tricky when additional purchases are made after a stock split.
In summary, dividends and other income to a nonretirement account are taxable, while the effects of a stock split are not calculated for tax purposes until the stock is sold. Once sold, the investor adjusts the cost basis to account for the shares that experienced the split. It is important for investors to work with their financial advisors and tax professionals to determine how dividends and stock splits affect their tax situations. For example, since 2013, qualified dividends have taxed at a rate of 20% for higher earners.
Advisor Insight
Scott Gaynor, CFP®, AIF®
KCS Wealth Advisory, LLC, Los Angeles, CA
For stock dividends, it depends on the type of account. For retirement accounts, stock dividends are not taxed. In a non-retirement account, qualified dividends are taxed at long-term capital gains rates depending on your tax bracket (federal rates are 0%, 15%, or 20%), while non-qualified dividends are taxed at ordinary income rates just like regular income. Investors must also hold shares for more than 60 days during the 120-day holding period. In general, most regular dividends from U.S. companies are considered qualified, with some exceptions.
Stock splits are generally not taxable, as the cost basis per share is updated to reflect the new stock structure and price so that the total market value is the same. Since you did not make any gains on the stock split, no taxes are owed.
FAQs
Stock splits don't create a taxable event; you merely receive more stock evidencing the same ownership interest in the corporation that issued the stock. You don't report income until you sell the stock.
Are stock dividend payments taxable? ›
They're paid out of the earnings and profits of the corporation. Dividends can be classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates.
What happens to dividends when a stock splits? ›
Key Takeaways
A dividend, or cash payment made periodically by a company, is typically adjusted proportionately to reflect a stock split, so that the total paid out does not change. Stock splits will affect options holders, but the necessary adjustments are made automatically in their accounts.
Am I taxed on dividends that are reinvested? ›
Whether or not you reinvest dividends has no impact on the taxes you'll pay. If you hold securities in a taxable account, you'll pay taxes on the dividend amount regardless of whether you reinvest or not.
What are the disadvantages of a stock split? ›
However, stock splits have disadvantages. One of the primary drawbacks is the cost involved: legal fees, paperwork, and shareholder communications. These costs can be substantial for smaller companies. Another disadvantage is a potential increase in the stock's volatility.
Is a stock split taxable? ›
Stock splits don't create a taxable event; you merely receive more stock evidencing the same ownership interest in the corporation that issued the stock. You don't report income until you sell the stock. Your overall basis doesn't change as a result of a stock split, but your per share basis changes.
How much tax do I pay on dividends? ›
Dividend tax basics
Dividends are taxed at 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate). Before 6 April 2022, these rates were: 7.5%, 32.5%, and 38.1%.
Is it better to reinvest dividends or take the cash? ›
If you had taken your dividend payments in cash instead of reinvesting them, you would have pocketed $24,367.68 in dividends. But you would have just 1,000 shares now, valued at only $134,640. By reinvesting your dividends each year, you increased your gains by 47%.
How much dividends are tax free? ›
Qualified and ordinary dividends have different tax implications that impact a return.3 The tax rate is 0% on qualified dividends if taxable income is less than $44,625 for singles and $89,250 for joint-married filers in the 2023 tax year.
How do I know if my dividends are taxable? ›
How dividends are taxed depends on your income, filing status and whether the dividend is qualified or nonqualified. Qualified dividends are taxed at 0%, 15% or 20% depending on taxable income and filing status. Nonqualified dividends are taxed as income at rates up to 37%.
“There's no particular advantage for those who already have shares,” Holden says. “Nothing about ownership is going to change. You might have twice as many shares, but they are at half the price, so it balances out.” For those who aren't already shareholders, though, a stock split can provide motivation to buy.
Is it good to own a stock that splits? ›
Do stock splits benefit investors? – It's nice to own more shares after a split, since the reduced per-share price might mean there's room for greater potential price growth. But investors shouldn't buy a stock simply because they hope it'll rise in price after a split.
Do investors lose money in a stock split? ›
In a stock split, a company divides its existing stock into multiple shares to boost liquidity. Companies may also do stock splits to make share prices more attractive. For shareholders, the total dollar value of their investment remains the same because the split doesn't add real value.
Are stock dividends considered earned income? ›
Earned income Earned income includes wages, salaries, tips, and other employee pay. 8. The interest you earn on your savings account is an example of what type of income? Unearned income Interest and dividends are examples of income that is not earned.
Are stock dividends recorded as income? ›
Cash or stock dividends distributed to shareholders are not recorded as an expense on a company's income statement. Stock and cash dividends do not affect a company's net income or profit. Instead, dividends impact the shareholders' equity section of the balance sheet.
What are non taxable stock dividends? ›
DEFINITION of Nontaxable Dividends
Nontaxable dividends are dividends from a mutual fund or some other regulated investment company that are not subject to taxes. These funds are often not taxed because they invest in municipal or other tax-exempt securities.
Are US stock dividends taxable? ›
Yes, the IRS taxes dividend income -- but not always; it depends on a few circ*mstances. Let's look at some exceptions. A common exception is dividends paid on stocks held in a retirement account such as a Roth IRA, traditional IRA, or 401(k).
