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Do I have to claim reinvested dividends as income?

April 16, 2012: 5:05 AM ET

I have shares of a stock that pays quarterly dividends. At the end of the year, I get a 1099-dividend statement and I usually add the dividends to my taxes as income. This year I noticed that I reinvest all my dividends. So do I have to claim this as income?
—- Name withheld

Reinvested dividends are considered income—so you do, in fact, owe tax on them. On your 1099 statement, box 1(a) reports your gross dividends. Box 1(b) reports the amount of those dividends that were qualified dividends. These are taxed at long-term capital gains rates, says to Dallas CPA Wray Rives. If the amount in box 1a is greater than box 1(b), the difference is taxed as ordinary income. Form 1040 has a dividend worksheet on page 37 to "walk you through the calculation," says Rives.

Also worth noting: When you sell the stock, the reinvested dividends will be factored into the calculation of your cost basis, or original value of the security. That, in turn, will impact how much capital gains tax is owed.

-- Jeff Wuorio

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