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JUNE 7, 2021

Are reinvested dividends taxable?

Answered by
Vinay Navani
Shareholder, WilkinGuttenplan
Generally, dividends earned on stocks or mutual funds are taxable for the year in which the dividend is paid to you, even if you reinvest your earnings.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
If you receive dividends during the year, you should receive a Form 1099-DIV for such year detailing how much you've been paid, so that you can include that total in your taxable income. That's true even if you're participating in an automated dividend reinvestment plan (DRIP), which allows you to use any dividends earned to purchase more shares of the stock rather than receiving cash. If, however, a company pays you a dividend in stock and doesn't offer you a choice between cash or stock, you may not have to pay taxes on that until you sell the shares.

At what rate will reinvested dividends be taxed?

As for how dividends are taxed, "qualified dividends," which must meet several conditions, are generally taxed at preferential, long-term capital gains rates that are generally lower than ordinary income tax rates. Dividends that don't meet the qualified dividend conditions are generally taxed at ordinary income rates. However, there are investment strategies and retirement accounts that don't require that you pay taxes on these cash dividends. A financial or tax professional can give you more information.
Currently, the maximum tax rate on qualified dividends is 20%. Even if you include the 3.8% net investment income tax for married couples filing jointly and who are earning $250,000 or more ($125,000 or more for married couples filing separately; $200,000 or more for single individuals; and $250,000 for a qualifying widow with a child), this compares very favorably with the 37% top rate on ordinary income.
In addition to their potential tax advantages, dividend-paying stocks can potentially provide investors with regular, tangible returns regardless of market conditions. Dividend payouts are often seen as a sign of a company's financial health and management's confidence in future cash flow.
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This article was written by a third party not affiliated with Merrill or any of its affiliates and is for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Merrill or any of its affiliates.

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