Most DRIP dividends that are paid on shares of stocks are considered qualifying dividends, so they are taxable at a rate of 10 percent for low-income individuals and 15 percent for others on your income tax return. If they are nonqualifying dividends, they will be taxed at the same rate as your ordinary income. Those are the tax rates at least through 2011 under current tax law. You should verify your tax rates with your tax advisor.
You must pay these taxes whether you reinvest the dividends or received them in cash. You must pay taxes on all dividends, reinvested or not, in the year in which you received the dividends. So if you are reinvesting your dividends, even though you didn’t get cash, you still need to pay taxes.