EMBQA From United States of America, joined Oct 2003, 9364 posts, RR: 11 Posted (7 years 3 days 20 hours ago) and read 1183 times:
So here is a question for those of you in the better know.......... I just did my taxes via the Turbo Tax program. Very easy - very streight forward especially for me with no major deductions. My question... I had to file 1099-DIV forms and pay taxes for dividends on the stocks I owe, but my dividends are reinvested..!! I will not see them until I sell my stocks.....and when I sell my stocks, they'll tax me again....!! I didn't think they could tax you twice on income...? Did I miss something..?
"It's not the size of the dog in the fight, but the size of the fight in the dog"
ThreeIfByAir From United States of America, joined Aug 2007, 716 posts, RR: 0
Reply 1, posted (7 years 3 days 19 hours ago) and read 1151 times:
I'm not an accountant by any means, but I think I understand your situation. I'm sure an actual accountant could explain this much better.
Your dividends are taxed whether or not you take them as cash or additional shares of stock. This is considered dividend income, and is taxed at 15% (or 5% if you are in a low tax bracket).
Your dividends are "realized" when they are paid - that is, you could have had the money (even if you didn't take it as cash). Then, you are taxed on the gains of the stock you own when you sell.
Hypothetically, if you had taken the dividend income as cash and put in a savings account at a bank, the same situation of "double taxation" would occur: first on the dividend income, then on the interest income from the savings account.
Where the double taxation does occur is with coporate profits. Corporations have to pay income taxes on their profits, even if they are distributed as dividends, which are taxed again when investors recieve them.
You're exactly right. It really isn't double taxation. If you received $5 in dividends in cash or otherwise, you would be taxed on that gain. Then say you buy 1 share of stock at $5. Your tax basis in that stock is $5 (you've already paid tax on that $5). If you sell the stock at $10, you would be taxed on the gain of $5. So you're really being taxed incrementally.
Quoting EMBQA (Thread starter): I didn't think they could tax you twice on income...? Did I miss something..?
There is nothing in the Constitution that prevents the government from taxing you once, twice, or ten times on the same income. Congress/Treasury/IRS usually try to avoid double taxation schemes (except for C corporations, which are indeed taxed twice, once at the corporate level, and again at the individual level), but that is more of a political/fairness approach than it is a legal one.