I'm frequently asked how to report a stock dividend on an individual tax return. The fact is that normally you don't report a stock dividend or stock split on your tax return, because it's a paper transaction that doesn't generate any income in the year of the split.

But you do have to account for it by adjusting the per-share cost, so it affects your calculations when you sell all or part of the shares later.

Let's take an actual situation. On July 1 there was a 5-for-4 split in the shares of Esmark Inc. (This also could be referred to as a 25 percent stock dividend.)

If we assume you had bought 100 shares of Esmark in 1978 at a total cost of $3,000 (including brokerage fees), you had a per-share cost of $30 before the split.

Now -- after the split -- you own 125 shares. If you divide the original $3,000 cost by the new share total of 125, you get a new per-share cost of $24. That $24 becomes the cost basis of each share for calculating capital gain or loss when you sell the shares.

Question: Like many of your readers, I am interested in providing for the educational needs of my children. I earn an annual salary of $50,000 and have but one major liability -- a 20-year home mortgage of $40,000 obtained three years ago at 8 3/4 percent interest.

As a result of a recent inheritance, I could pay off the mortgage and start investing what would have been the monthly mortgage payments in an education fund. Or I could hold onto the mortgage and invest the inheritance to generate the money needed. What is the best approach?

Answer: The second direction is the way to go. Hold onto that mortgage. In your tax bracket, that interest rate could come down to a cost of as little as 5 percent, after subtracting the federal and state income tax deductions for interest expense.

You can invest the inheritance funds in municipal bonds (or a tax-free unit trust) and pick up between 10 and 11 percent, with perhaps a small deduction for state income tax (depending on the bond issuer and your state of residence).

If your children are young enough to make it pay off, you could place the funds in a Clifford trust. Because of the children's relatively low tax bracket, it might then pay for the trust to invest in a safe taxable vehicle and generate as much as 14 or 15 percent for their educational needs.

In these days of high interest rates, an 83/4 percent mortgage is really a valuable asset. The mortgage holder is losing money (one reason the nation's S&Ls are in deep trouble), but for you the smart move is to hang on.

Q: What is the advantage of a long-term capital loss being applied to a short-term gain?

A: A long-term capital loss is worth twice as much when applied against a short-term capital gain than when it is used simply to reduce other income.

Let's use some numbers to illustrate. (All calculations are based on the 1980 tax rules.) If you sold 100 shares of ABC Corp. stock (which you owned for more than a year) at a loss of $1,000, you get to subtract $500 -- 50 percent of that $1,000 long-term loss -- from your salary or other income.

But suppose you sold 100 shares of XYZ Corp. stock (owned for less than a year) at a net profit of $1,000. If you had no other Schedule D transactions, you must add the entire $1,000 short-term gain to your other income.

Now if both stock sales took place in the same year, you can offset the $1,000 short-term gain (all of which would otherwise be taxable) by the full $1,000 long-term loss (only half of which otherwise could be used to reduce income).

So you end up with a "wash" on Schedule D, with neither gain nor loss being carried to page 1 of Form 1040. By applying the long-term loss to reduce -- in my example, to eliminate -- a short-time gain, you get to use the entire $1,000 of the loss to reduce taxable income rather than just the $500 that otherwise would be available.