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 percent 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 percent, 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 percent for higher earners.
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.