If the shares are held in a retirement account, stock dividends and stock splits are not taxed as they are earned. Generally, non-retired brokerage accountall income is taxable in the year it is received. This includes dividends, realized capital gains and interest. Qualified dividends are payments made from after-tax company profits and are taxed at 15% for most shareholders who exceed certain income thresholds. Stock split is not a taxable eventbut they affect cost basis for a shareholder. To determine when and how much tax is due for any of these events, consider the following criteria and consider basic tax rules for investment.

Dividend payments received on an account are recorded and a Form 1099-DIV is mailed by the brokerage firm to report the total of each tax year. These payments are subject to tax whether the cash is received or the dividends are reinvested to purchase more shares. Form 1099-DIV shows a breakdown of qualified dividends and ordinary dividends. Qualified dividends are those paid by American companies or by foreign companies whose countries of domicile have special conditions. tax conventions 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. corporation, receives $250 in dividends for the year, these are classified as qualified dividends, so the tax due (for most taxpayers) is 15%, or $37.50.

Stock splits are very different from dividends because they are not distributions of business profits. By trying to understand stock split or reverse splits, realize that it is simply a restructuring of outstanding shares and price per share; no tax is payable. For example, an investor owns 100 shares of ABC stock at $80 per share for a total cost of $8,000. If the company issues a 2-for-1 split, then the investor owns 200 shares at $40 per share but its total cost remains the same, so no gains or losses are realized. THE stock split only affects the cost per share basis. If no additional investment is made in ABC, it is not difficult to determine the cost basis at the time the shares are sold. Determining cost basis can be tricky when additional purchases are made after a stock split.

In summary, dividends and other income from a non-retirement account are taxable, while the effects of a stock split are not calculated for tax purposes until the shares are sold. Once sold, the investor adjusts the cost basis to account for the shares that were subject to the split. It is important that investors work with their financial advisors and tax professionals to determine the impact of dividends and stock splits on their tax situation. For example, since 2013, qualified dividends have been taxed at a rate of 20% for high earners.