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Dividends - Ordinary (taxable dividends) are the most common type of distribution from a corporation. They are paid out of the earnings and profits of a corporation and is ordinary income to you. Some corporations offer a dividend reinvestment plan. This plans lets a shareholder choose to use dividends to buy more shares of stock instead of receiving a cash dividend. Even though cash is not received, the dividend is still taxable ordinary income. Stock dividends generally are nontaxable and are not reported on the tax return. Nontaxable stock dividends will change the basis per share of stock owned. A stock split used by companies that want to lower the price of their stock to attract investors. When this happens investors automatically receive additional shares at no cost. The catch: Each share is worth less because there are more shares outstanding. Of course, if the share price climbs after the split you benefit because you own more shares. You usually won't owe any income taxes at the time of the stock split. But your cost basis in each share is reduced. So, a $60 per share cost basis becomes $30 per share after a two-for-one split. The lower basis is what you must use to compute your gain or loss when you sell the stock.

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