Preparing for Taxes
Deduct Dividend Reinvestments
Many investors choose to re-invest dividends from individual stocks or from mutual funds into additional shares. (For example, if you receive $40 in dividends, you can choose to receive a check or to automatically purchase more shares or fractions of shares, depending on the share price with those funds.)
When you sell a stock or shares of a mutual fund, any gains are taxable, of course, but if you have reinvested your dividends, make sure you account for the amount of reinvestment when you calculate your gains. Dividend reinvestments automatically increase the cost basis (in other words, the amount you paid) for an investment. Say you originally invested $100 and later sold shares for $200. Your taxable gain is $200, but if along the way you reinvested $20 in dividends, your taxable gain is only $80. If you forget to include reinvested dividends in your cost basis, you can pay more in taxes than you should.