Select Page
Why Are Reinvested Dividends Taxable?

Have you ever received a tax document showing you a taxable amount of dividends? You probably didn’t receive a check for those dividend amounts, but you’re still required to pay taxes on them. Why is that and how does it affect you?

Why are they taxable?

Reinvested dividends come from dividend payments for stocks and other securities that you own. You’ve elected to not receive those dividend payments, but to instead use those earnings to buy additional shares of the security. You didn’t receive the money directly, but you did benefit from having the payout. These dividends are taxable to you even though you didn’t directly receive them. Dividends received on securities you’ve owned for less than one year are treated as ordinary dividends and are taxed at your ordinary tax bracket. However, dividends received on securities you’ve owned for more than a year are treated as qualified dividends and are taxed at a lower capital gain tax rate ranging from 15-20%.

How does this affect me?

While paying taxes on the relatively small amount of dividends does seem petty, doing so creates basis in the shares you purchased with what is now considered post-tax money. This is because you paid taxes on the dividends even though they were reinvested. Basis is incredibly important when selling securities. For example, you purchase 10 shares of a stock for $100 and then sell them over a year later for $150. You are taxed at the long-term capital gain tax rate of 15% on the gain, which was $50. This case could be true if you purchased the shares with money through your advisor, or with reinvested dividends. What if you weren’t taxed on those reinvested dividends though? The entire $150 would be taxable as a capital gain.

That’s all well and good, but let’s think bigger for a moment. In one situation I experienced, one of my clients sold hundreds of shares of Exxon stock after having paid thousands of dollars in taxes on reinvested dividends over the years. By paying the tax in smaller increments over the years they averaged out their tax, rather than selling all the shares in one year as they did and having to report significantly higher gains and paying taxes at a much higher tax bracket.

Paying taxes on smaller reinvested dividends through the years is a much more attractive option than not recognizing the income in smaller intervals. There can be extreme cases where you reinvest tens of thousands of dollars in dividends each year, and if that’s the case you may need to elect to have some small portion of those dividends be sent to you by check. This is because the tax burden of $20,000 of qualified dividends taxed at the long-term capital gain tax rate of 15% would be $3,000 in tax. A difficult amount to cover when you’re not receiving the fruits of your investment directly.

If you have any questions about the potential tax liability of your financial decisions, please call Molen & Associates for your free 10-minute consultation today. You can reach us at (281) 440-6279. If this information was helpful, please subscribe to be notified when we release other blog posts in the future.

Kevin Molen
Tax Manager

The Molen & Associates Difference

Mike Forsyth

“Super helpful and timely. This is our first year with them and we look forward to trusting them with our taxes and business books for years to come.”

Caitlin Daulong

“Molen & Associates is amazing! They run an incredibly streamlined process, which makes filing taxes a breeze. So impressed with their attention to detail, organization, and swift execution every year. Cannot recommend them enough!”

Sy Sahrai

“I’ve been with Mr. Molen’s company for few years and I felt treated like family respect and dignity. They are caring, professional and honest, which hard to find these days. Love working with them.”

Corporate Transparency Act – Beneficial Ownership Reporting: Are You Prepared?

he Corporate Transparency Act (CTA), enacted as part of the Anti-Money Laundering Act of 2020, introduces significant changes in beneficial ownership reporting requirements for certain entities operating in the United States. These regulations, set to take effect on...

The IRS is Cracking Down on S-Corp Salaries: How To Your Reasonable Compensation is Safe

The IRS is turning its attention to S-Corporations (S-Corps) and the salaries paid to shareholder-employees. Ensuring that you are paying yourself a "reasonable compensation" is crucial to staying compliant with the law and avoiding potential financial consequences....

Should You Be Making Quarterly Payments?

Tackling your taxes as a small business owner can often feel like a high-stakes game of strategy and a little guesswork. One of the key moves in this intricate game is mastering the art of quarterly tax payments. If you're looking to stay ahead in the tax arena and...

Slash Your Self-Employment Tax

Hey there, hardworking small business owners! Tax season is no walk in the park, but we've got a game-changing secret to share that could put more money back in your pocket. If you're tired of paying hefty self-employment taxes and want to keep more of your...

How Tax Planning Can Help You Grow, Preserve and Protect Your Wealth

Tax planning services from Molen & Associates help you make smart decisions regarding your taxes. We provide individualized advice and information that can save you money and protect your wealth. Our tax planning strategies go beyond just filing your taxes – we...

Why a Local Family Tax Firm is Your Best Co-Pilot in Space City!

Howdy, Houston small business owners! Tax time can be a real whirlwind, but fear not – we've got your back! When it comes to saving time, money, and headaches on your taxes, partnering with a local family tax firm can be the ultimate secret weapon. In this article,...

Uncovering the Top 5 Deductions to Save Time, Money, and Stress!

Howdy, fellow Houstonians! As small business owners in the heart of Texas, we know that taxes can be a daunting and complex puzzle to solve. But fret not, because today, we're here to equip you with some mighty tax hacks that will not only save you time and money but...

Streamline Your Finances with Molen & Associates: The Power of Corporate Accounting

In the fast-paced corporate world, managing finances with precision and expertise is paramount for the success of any business. Corporate accounting plays a vital role in ensuring that financial records are accurate, compliant, and capable of driving informed...

Mastering Your Numbers: The Secret to Small Business Tax Triumph!

Hey there, fellow small business owners! As entrepreneurs, we know that taxes can be a bit overwhelming, especially when you're trying to run a successful business. But fear not – we're here to equip you with the ultimate tax-saving superpower: mastering your numbers!...

Should I Get Life Insurance For My Kids?

Should I Get Life Insurance For My Kids? No parent wants to consider the possibility of collecting a death benefit on their child's life. And this is the reason many families are exploring the option of investing in a child life insurance policy to ensure their...

Request an Appointment Today

9 + 13 =

Call us at

Pin It on Pinterest

Share This