One way of earning money on your stock investments is through dividends. A dividend is a payment made to a company's shareholders as declared by the board of directors. Dividends are a form of taxable income. Dividends are not guaranteed, and are more likely to be paid by mature, well established companies than younger companies. Some companies offer their shareholders the option of automatically reinvesting their dividends into additional shares of company stock, but this does not affect the taxable nature of the dividend.
Dividends typically represent the paid out portion of the stock holder's share of the underlying company's earnings. The Internal Revenue Service considers dividends to be taxable income. Any company that pays dividends to you of at least $10.00 should provide you with a Form 1099-DIV detailing your total dividend payments, but you are responsible for reporting and paying income taxes on all dividends you received during the tax year regardless of whether or not you received a Form 1099-DIV.
Some companies offer you the option of participating in a dividend reinvestment program, or DRIP. This type of program allows the company to automatically reinvest dividends paid on your stock back into additional shares of the company stock. These programs may pay the brokerage commission to purchase stock on behalf of all of the plan's participants. DRIP plans provide you with the convenience of regular, automatic investing, and they have the advantage of dollar cost averaging of your investments in the company's stock. You can think of it as a sort of compounding of your investment dollars. The Internal Revenue Service considers dividends that are reinvested back into additional shares of stock to be taxable income in the tax year they are paid.
Some fees associated with reinvesting your dividends, such as service charges imposed by the company for operating the DRIP program, are not included in the cost basis of your stock, so you can deduct these fees as an investment expense. Some companies allow their dividend reinvestment programs to purchase additional shares of stock at a discount from the market price. The Internal Revenue Service considers the difference between the discounted purchase price and the market price to be an additional dividend that is taxable to the share holder.
You cannot deduct your reinvested dividends from your income when you file your federal income tax return. You must report all dividends you receive during the year, regardless of whether or not you reinvested those dividends in additional shares of the same stock. Report your reinvested dividends along with all other dividends on Line 9a of IRS Form 1040 or 1040A. If you receive more than $1,500 in dividends during the tax year you must also complete Schedule B of IRS Form 1040 and include it when you file your federal income tax return.
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