If a taxpayer reinvests dividend income from a mutual fund, how are the dividends treated for tax purposes?

When a taxpayer receives dividends from a mutual fund, those dividends are generally treated as taxable income in the year they are received, even if they are reinvested. This means that irrespective of whether the taxpayer chooses to take the dividends in cash or reinvest them to purchase more shares in the mutual fund, the IRS requires that these dividends be reported as income for tax purposes.

This treatment aligns with the concept that dividends represent a distribution of a portion of the company's earnings to its shareholders. Thus, they are taxable in the year they are declared and paid, making option B the correct answer. It reflects the understanding that the timing of dividend recognition for tax purposes is independent of the taxpayer's decision to reinvest those earnings back into the fund.

On the other hand, the other options imply different forms of tax treatment that do not align with IRS guidelines regarding dividend taxation. For example, suggesting dividends are taxed at a lower rate or not taxable until certain actions (such as withdrawal) occur misrepresents how dividend income is taxed.