Question about including dividends in total annual income

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Question about including dividends in total annual income

Postby ds1975 » Tue Oct 28, 2014 3:09 pm

A credit card application I received says I can include dividend income in the total annual income field. I have a brokerage account and receive dividends, but all dividends are automatically reinvested into the account. Do these still count as dividends I can include in my income since the income isn't realized by me and not included on my tax return (until I actually cash out)?

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Postby TheSwarm » Tue Oct 28, 2014 6:31 pm

The dividends you get from investments show show up on a 1099-div even if they are reinvested. So they should be considered income in the year they are paid.

Basically if the dividend was paid during the calendar year its income to you. After it was paid, you "chose" the reinvestment option and it purchases more shares at the current market price. Regardless, the dividend was paid and what you decided to do with it afterwards has no effect on if it's considered income or not. You'll just likely have a different basis in the new shares purchased each time a dividend is paid since the market price will always be fluctuating.

And to the best of my knowledge they should be reported on your tax return, because technically it's 2 separate transactions.

1. Payment of dividend to you
2. Purchase of more stock/mutualfund/etf/ etc.

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Postby CarefulBuilder14 » Wed Oct 29, 2014 11:14 am

I am an Enrolled Agent - a federally authorized tax professional. If you receive dividends in a taxable account (unlike an IRA), they are most likely taxable as they are paid, even if you reinvest them.

The only exceptions would possibly exist if you're using the term 'dividend' more loosely than a tax professional does.

For example, if you own a mutual fund or ETF that holds only AMT-free municipal debt of your state, then interest distributions (which many non-tax pros might refer to as dividends) would be tax-exempt.

Also, a corporation/partnership/mutual fund/ETF could make a non-taxable return of capital distribution.

Many brokerages do not send out 1099s for small accounts (where the total income is less than $10 or $20).

I'm not sure what's going on in your situation. For your dividend income to realistically alter a credit decision, it would have to be a few thousand dollars. At that income level, you're definitely getting a 1099.

And brokerages report all that information not just to you, but also to the government. They send copies of the 1099s of their customers to the IRS. And even offshore institutions that used to be tax havens are now increasingly reporting to the IRS.

I would need more information about what's on your 1099 to give further advice. There is probably some additional information you need to report to the IRS. There may also be additional tax due.

TheSwarm is correct that you are making two separate transactions from a tax perspective. You're getting a dividend, and then using the cash to buy more shares automatically. From a tax perspective, it's just like you get cash and then manually enter a 'buy order' in the amount of the dividend you.
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