What is true regarding the dividends Naomi received that were reinvested?

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When dividends are received and reinvested, they are typically considered taxable income in the year they are received, irrespective of whether they are taken in cash or reinvested to purchase more shares. Therefore, for Naomi, the dividends she received in 2017 are indeed taxable and must be reported on her tax return for that year.

Additionally, the amount of the reinvested dividends also contributes to the cost basis of her shares. This means that when the dividends are used to purchase additional stock, her basis in the overall investment is adjusted upwards by the amount of those reinvested dividends. This adjustment in basis is significant because it can reduce her capital gains when she eventually sells her shares, as the gain is calculated based on the difference between the selling price and her total adjusted basis.

In summary, the statement accurately reflects the dual consequences of the reinvested dividends: they are taxable in the year received and also serve to increase her basis in the stock she owns.

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