Q:

Subject: Taxes on Dividend Reinvestment

Kerry, have reinvested dividends for the 1st time, and had a few questions.  If you received, say $100, in dividends in 04 which all were reinvested (in a DRIP program), do you load $100 to line 9 of the 1040?  What if you sold your stock (a long-tern capital gain) including these dividends in 04?  Is the $100 of dividends taxed a 2nd time as a capital gain, with a $0 cost basis?

 

Thanks for your time.  Glad to see you over at the new SS blog.

A:

As you know, reinvested dividends are reported on Schedule B and subject to the same income tax as are dividends paid in cash.

The reinvested amounts won't be subjected to two taxes if you or your stockbroker do a proper accounting.  The offset to the dividend income is an increase in your cost basis of the stocks.  When you sell the stock, you need to show its cost basis as the accumulation of the original purchase price plus the reinvested dividends that were reported on Sch. B.  This is most efficiently accounted for if you use QuickBooks.  You credit dividend income and debit the stock asset account.

This is relatively easy to account for if you sell all of the stock at the same time.  However, if you sell shares in multiple transactions, you will need to either specifically identify the cost of the individual shares you are selling, or recalculate the average cost per share of your total holdings each time you make a new purchase, such as through a reinvested dividend.

If your stocks are managed by a stockbroker, I have found that most of them are very good at providing their clients with good year-end reports showing the sales and the cost basis of the shares sold.  This is especially true with mutual funds.

I hope this helps.  Your personal tax advisor should be able to help you set up and operate your accounting system to keep track of the reinvested dividends.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/29/2005 06:34:00 PM Send this post: