If the shares are held in a retirement account, stock dividends and stock splits are not taxed as they are earned. Generally in a non-pension brokerage accountany income is taxable in the year it is received. This includes dividends, realized capital gains and interest. Qualified dividends are payments made out of after-tax business profits and are taxed at 15% for most shareholders who fall within certain income thresholds. Stock splits are not a taxable eventbut it affects cost basis for a shareholder. To determine when and how much tax is due on one of these events, look at the following criteria and review the basic rules on investment taxation.

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

Stock splits are quite different from dividends because they are not distributions of business profits. When you try understand stock split or reverse splits, realize they are just a restructuring of outstanding shares and share price; no fee is charged. For example, an investor owns 100 shares of ABC at $80 per share for a total cost of $8,000. If the company issues a 2-for-1 split, the investor then owns 200 shares at $40 per share, but his total cost remains the same, so no gain or loss is incurred. The stock split it only affects the cost per share basis. If no more investments are made in ABC, calculating the cost basis when the shares are sold is not difficult. Calculating the cost basis can be difficult when additional purchases are made after an inventory split.

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