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DRIP vs NOn-DRIP and Tax implications
#1
Hello:
Have a quick question here:

Currently I do not DRIP, and just using the cash from the dividends along with my monthly (around 1200) to purchase other stocks that are fair/undervalued.

Are there any tax implications of not dripping and doing the way as I am currently doing? Or, it really doesn't matter from tax perspective regardless of the whether DRIP or not? Like, tax will be the same on divs received.

I just started in June this year and only have around 17K so far in the account, and I thought at this point I don't have substantial divs to start DRIP.

Any thoughts or feedback would be appreciated. Thanks.
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#2
I dont think Drip vs non drip has an impact on taxes.

HOWEVER - it might affect wash sale rule timing if you drip and tax loss harvest. Can someone verify?
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#3
(11-06-2015, 12:20 AM)navyasw02 Wrote: I dont think Drip vs non drip has an impact on taxes.

HOWEVER - it might affect wash sale rule timing if you drip and tax loss harvest. Can someone verify?

Thanks.
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#4
It could be that it's different where you live, but for as far as I know, if you DRIP you don't have to pay taxes over the new shares. If you let the dividend pay out, you do pay dividend tax.

Could be important. On the other hand, if you can invest the dividend in stocks that are better valued, than maybe the tax on dividend is not important?
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#5
(11-08-2015, 04:09 AM)DutchDiv Wrote: It could be that it's different where you live, but for as far as I know, if you DRIP you don't have to pay taxes over the new shares. If you let the dividend pay out, you do pay dividend tax.

Could be important. On the other hand, if you can invest the dividend in stocks that are better valued, than maybe the tax on dividend is not important?

DutchDiv, Thanks.

I'm in the US. Can you please explain a little more that when DRIPing, no taxes on the new shares?
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#6
I don't know if it's the same for you, but for me, if I get dividend, than I pay 15% tax. This means that if I get 100 dollar in dividend, than I only get 85 net as you know. If I use DRIP, than I get 100 dollar in stocks. This saves me the tax (although we get the tax back later, so not a big saving for me, but that's different in most countries).

Because of this I can imagine DRIP'ing is better. But it depends on your tax situation.
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#7
For the United States:

Quote:Taxation
Another misconception about DRIPs is that they are not subject to tax because the investor is not receiving a cash dividend per se. In fact, while DRIPs are beneficial for their cost-effective approach to investing, they are still subject to tax. Because there was an actual cash dividend, although reinvested, it is considered to be income and thus taxable. And, as with any stock, capital gains from shares held in a DRIP are not calculated and taxed until the stock is finally sold, usually several years down the road. (For more, check out Capital Gains Tax 101.)

Read more: The Perks Of Dividend Reinvestment Plans http://www.investopedia.com/articles/02/...z3r0AQurAl
Follow us: Investopedia on Facebook

http://www.investopedia.com/articles/02/011602.asp

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#8
(11-09-2015, 08:44 AM)rapidacid Wrote: For the United States:

Quote:Taxation
Another misconception about DRIPs is that they are not subject to tax because the investor is not receiving a cash dividend per se. In fact, while DRIPs are beneficial for their cost-effective approach to investing, they are still subject to tax. Because there was an actual cash dividend, although reinvested, it is considered to be income and thus taxable. And, as with any stock, capital gains from shares held in a DRIP are not calculated and taxed until the stock is finally sold, usually several years down the road. (For more, check out Capital Gains Tax 101.)

Read more: The Perks Of Dividend Reinvestment Plans http://www.investopedia.com/articles/02/...z3r0AQurAl
Follow us: Investopedia on Facebook

http://www.investopedia.com/articles/02/011602.asp

rapidacid, thanks for the info. I guess it makes sense to DRIP if I am not needing the income for at least 15-20 years, this way, I can also extend/postpone paying taxes every year, and only pay taxes at the time of the stock being sold during retirement years (which actually might put me in a lower tax rate)?

Am I correct with this understanding? Thanks.
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#9
It's been a while since I dripped anything not in a tax differed account. I believe in a taxable account you pay taxes on those dripped divi's the year you get them, then you pay any taxable gains when you sell those dripped divi's. If memory serves me correctly, that's why all my stocks that pay a divi in my taxable account go directly to cash in order to keep taxes more simple.

(11-09-2015, 12:02 PM)stewardinlife Wrote:
(11-09-2015, 08:44 AM)rapidacid Wrote: For the United States:

Quote:Taxation
Another misconception about DRIPs is that they are not subject to tax because the investor is not receiving a cash dividend per se. In fact, while DRIPs are beneficial for their cost-effective approach to investing, they are still subject to tax. Because there was an actual cash dividend, although reinvested, it is considered to be income and thus taxable. And, as with any stock, capital gains from shares held in a DRIP are not calculated and taxed until the stock is finally sold, usually several years down the road. (For more, check out Capital Gains Tax 101.)

Read more: The Perks Of Dividend Reinvestment Plans http://www.investopedia.com/articles/02/...z3r0AQurAl
Follow us: Investopedia on Facebook

http://www.investopedia.com/articles/02/011602.asp

rapidacid, thanks for the info. I guess it makes sense to DRIP if I am not needing the income for at least 15-20 years, this way, I can also extend/postpone paying taxes every year, and only pay taxes at the time of the stock being sold during retirement years (which actually might put me in a lower tax rate)?

Am I correct with this understanding? Thanks.

Steward, you're paying taxes on the divi's the year you receive them whether you drip them or not, it's still considered income. The only thing you're putting off is the capital gains tax. I'm assuming you're talking about non-retirement accounts.
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#10
(11-27-2015, 05:20 PM)rayray Wrote: It's been a while since I dripped anything not in a tax differed account. I believe in a taxable account you pay taxes on those dripped divi's the year you get them, then you pay any taxable gains when you sell those dripped divi's. If memory serves me correctly, that's why all my stocks that pay a divi in my taxable account go directly to cash in order to keep taxes more simple.

(11-09-2015, 12:02 PM)stewardinlife Wrote:
(11-09-2015, 08:44 AM)rapidacid Wrote: For the United States:

Quote:Taxation
Another misconception about DRIPs is that they are not subject to tax because the investor is not receiving a cash dividend per se. In fact, while DRIPs are beneficial for their cost-effective approach to investing, they are still subject to tax. Because there was an actual cash dividend, although reinvested, it is considered to be income and thus taxable. And, as with any stock, capital gains from shares held in a DRIP are not calculated and taxed until the stock is finally sold, usually several years down the road. (For more, check out Capital Gains Tax 101.)

Read more: The Perks Of Dividend Reinvestment Plans http://www.investopedia.com/articles/02/...z3r0AQurAl
Follow us: Investopedia on Facebook

http://www.investopedia.com/articles/02/011602.asp

rapidacid, thanks for the info.  I guess it makes sense to DRIP if I am not needing the income for at least 15-20 years, this way, I can also extend/postpone paying taxes every year, and only pay taxes at the time of the stock being sold during retirement years (which actually might put me in a lower tax rate)?

Am I correct with this understanding?  Thanks.

Steward, you're paying taxes on the divi's the year you receive them whether you drip them or not, it's still considered income. The only thing you're putting off is the capital gains tax. I'm assuming you're talking about non-retirement accounts.

Thanks rayray.  Yes, this is for non-reitrement accounts.
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