1099-Div and reinvested dividends

[ripvanwinkle]

Why am I issued a 1099-DIV and have to claim it on my taxes when I do not actually receive the money? Shouldn't I have to pay it only when I sell the reinvested shares?

[The Captain]

Only if it's in a tax deferred account.

If the dividends are in a taxable account it's as if you received the cash/dividend then at that same exact moment turned around and used that cash (income) to purchase additional shares.  You've in essence constructively received the money but elected to immediately purchase more shares.

Does this make sense?

[ArchietheDragon]

IRS wants their cut.

[vonna]

And your reinvested shares increases your cost basis

[ripvanwinkle]

Jan 3, 2015 14:11:11 GMT -5 ArchietheDragon said:

IRS wants their cut

[ripvanwinkle]

Bummer. You'd think I would only be taxed when I sell the shares. Like taking cash from a IRA

[Deleted]

Captain explained it well.

[mwcpa]

Captain has it....

you could have just as easily taken the distribution in cash, but you elected to take that distribution and buy new shares.... one of the draw backs of re-investing dividends and capital gain distributions.

From IRS publication 550.

"Dividends Used To Buy More Stock


The corporation in which you own stock may have a dividend reinvestment plan. This plan lets you choose to use your dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. Most mutual funds also permit shareholders to automatically reinvest distributions in more shares in the fund, instead of receiving cash. If you use your dividends to buy more stock at a price equal to its fair market value, you still must report the dividends as income.

If you are a member of a dividend reinvestment plan that lets you buy more stock at a price less than its fair market value, you must report as dividend income the fair market value of the additional stock on the dividend payment date.

You also must report as dividend income any service charge subtracted from your cash dividends before the dividends are used to buy the additional stock. But you may be able to deduct the service charge. See Expenses of Producing Income in chapter 3.

In some dividend reinvestment plans, you can invest more cash to buy shares of stock at a price less than fair market value. If you choose to do this, you must report as dividend income the difference between the cash you invest and the fair market value of the stock you buy. When figuring this amount, use the fair market value of the stock on the dividend payment date. "

[mwcpa]

"IRS wants their cut."

Actually.... it's not IRS, it's Congress who believe we should pay taxes, the IRS is just the group Congress created to do the dirty work....

[TheOtherMe]

Jan 3, 2015 17:56:43 GMT -5 mwcpa said:

"IRS wants their cut."

Actually.... it's not IRS, it's Congress who believe we should pay taxes, the IRS is just the group Congress created to do the dirty work....

All the IRS does is enforce the laws Congress passes, says the retired IRS Agent.  

[The Captain]

mwcpa Always glad you have you weigh in.  As I've said before, I deal more on the large corporate side of things and will always defer to you on individual and partnership items.  How is busy season going?

Jan 3, 2015 17:40:01 GMT -5 mwcpa said:

Captain has it....

you could have just as easily taken the distribution in cash, but you elected to take that distribution and buy new shares.... one of the draw backs of re-investing dividends and capital gain distributions.

From IRS publication 550.

"Dividends Used To Buy More Stock


The corporation in which you own stock may have a dividend reinvestment plan. This plan lets you choose to use your dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. Most mutual funds also permit shareholders to automatically reinvest distributions in more shares in the fund, instead of receiving cash. If you use your dividends to buy more stock at a price equal to its fair market value, you still must report the dividends as income.

If you are a member of a dividend reinvestment plan that lets you buy more stock at a price less than its fair market value, you must report as dividend income the fair market value of the additional stock on the dividend payment date.

You also must report as dividend income any service charge subtracted from your cash dividends before the dividends are used to buy the additional stock. But you may be able to deduct the service charge. See Expenses of Producing Income in chapter 3.

In some dividend reinvestment plans, you can invest more cash to buy shares of stock at a price less than fair market value. If you choose to do this, you must report as dividend income the difference between the cash you invest and the fair market value of the stock you buy. When figuring this amount, use the fair market value of the stock on the dividend payment date. "

[mwcpa]

busy season.... not looking forward to it.... it's already been hectic and with more Congressional budget cuts (punishment for the few that gave conservative groups a hard time getting tax exempt status) to the IRS it may get rough this season..... most of my clients are closely held businesses and their owners so starting mid December "planning" season commenced.... fortunately I get a lull for a week, but then it won't stop until late April