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How to handle dividends and the taxes on them on a non retirement account
Posted on 8/13/23 at 6:54 am
Posted on 8/13/23 at 6:54 am
So once I paid off my car, I started putting that money in some high yield savings and an investment account with some index funds.
Well that investment account is into the 5 figures now and obviously growing. This is also the account now where a good portion of any raises go once retirement has been jacked up as well. Obviously this is great and makes me feel proud of myself for saving responsibly, but now the dividends are starting to creep up a little. For the first few years they would barely eat into my tax refund so no big deal, but pretty soon they will likely start eating into more and more of it and then I will start owing money once they surpass it.
What is the best way to handle paying the tax on these dividends? I always reinvest them and so far haven’t sold any stock out of this account to avoid any capital gains.
Should I sell a little bit of stock to handle the dividends? But then I’d also now need to pay LT capital gains on top of that which seems like a bit of a hassle. I do all of my taxes myself but maybe now I need an accountant
Well that investment account is into the 5 figures now and obviously growing. This is also the account now where a good portion of any raises go once retirement has been jacked up as well. Obviously this is great and makes me feel proud of myself for saving responsibly, but now the dividends are starting to creep up a little. For the first few years they would barely eat into my tax refund so no big deal, but pretty soon they will likely start eating into more and more of it and then I will start owing money once they surpass it.
What is the best way to handle paying the tax on these dividends? I always reinvest them and so far haven’t sold any stock out of this account to avoid any capital gains.
Should I sell a little bit of stock to handle the dividends? But then I’d also now need to pay LT capital gains on top of that which seems like a bit of a hassle. I do all of my taxes myself but maybe now I need an accountant
11
Posted on 8/13/23 at 6:57 am to jlovel7
Just withhold more at work if you are W2.
Posted on 8/13/23 at 7:10 am to jlovel7
If you’re using funds that pay quarterly you can just turn the last quarter dividend reinvestment off and use that money.
Or just set aside a little every time you buy more stocks. I’d probably do this in your shoes.
Or just set aside a little every time you buy more stocks. I’d probably do this in your shoes.
Posted on 8/13/23 at 7:15 am to jlovel7
turbotax or hrblock both work great. there's a free one but i havent used it
Posted on 8/13/23 at 7:50 am to jlovel7
(no message)
This post was edited on 8/14/23 at 8:14 am
Posted on 8/13/23 at 8:00 am to jlovel7
Flatten the tax. Net the account. If not, the tax compounds in a taxable account and must be paid from somewhere. There's no magic.
Posted on 8/13/23 at 8:35 am to jlovel7
(no message)
This post was edited on 1/27/24 at 11:12 am
Posted on 8/13/23 at 8:40 am to jlovel7
I deal with the same “issue” and it only grows with time…I increase my withholdings for W2 to address it. It’s been the most straightforward way to address whatever incremental taxes that are not subject to withholding throughout the year.
I’ve read the posts in this thread and some are quite confusing responses given the OP’s question.
I’ve read the posts in this thread and some are quite confusing responses given the OP’s question.
Posted on 8/13/23 at 8:45 am to BestBanker
quote:
Flatten the tax. Net the account. If not, the tax compounds in a taxable account and must be paid from somewhere. There's no magic.
What does this even mean? Bunch of word salad.
quote:
turbotax or hrblock both work great. there's a free one but i havent used it
Irrelevant to this OPs question.
quote:
When you reinvest dividends and don’t sell any shares, there shouldn’t be any tax consequences at that time.
This is wrong in a taxable account.
Posted on 8/13/23 at 9:21 am to good_2_geaux
quote:
When you reinvest dividends and don’t sell any shares, there shouldn’t be any tax consequences at that time.
No
Posted on 8/13/23 at 9:45 am to jlovel7
Unless you are making well over $10,000 a year in dividends, I don’t see how this is even a problem. You shouldn’t be getting a tax refund at the end of the year anyway if you are doing your withholdings right. Why give the Feds your money for a year interest free? Part of being a successful adult is realizing you might have to write a check at the end of the year for taxes and you should have enough funds to do this. Alternatively, you could sell any stocks that are down at the end of the year to take a loss for tax purposes to offset dividends but this isn’t always an option.
Posted on 8/13/23 at 10:06 am to jlovel7
I cant imagine the dividends are much on a $10-$20k account, dont do anything right now, if you owe a tiny bit come tax season no big deal.
The problem starts to arise when you owe maybe a grand or two or mores because technically they can charge you a penalty for underpayment throughout year. Doesnt sound like you're close to there yet though.
For a few years we owed something like $4k-$5k due to gains in market and the penalty was basically a joke.
The problem starts to arise when you owe maybe a grand or two or mores because technically they can charge you a penalty for underpayment throughout year. Doesnt sound like you're close to there yet though.
For a few years we owed something like $4k-$5k due to gains in market and the penalty was basically a joke.
This post was edited on 8/13/23 at 10:13 am
Posted on 8/13/23 at 10:11 am to jlovel7
quote:
For the first few years they would barely eat into my tax refund so no big deal, but pretty soon they will likely start eating into more and more of it and then I will start owing money once they surpass it.
Congratulations.
Posted on 8/13/23 at 10:12 am to jlovel7
1) manually reinvest dividends but hold back about your expected tax burden (use dividends to pay the tax)
2) keep enough ‘regular’ cash to pay the taxes in checking/saving
3) sell some stock to pay the tax (if you aren’t careful and sell holdings you’ve held less than a year, you’ll raise your tax burden a bit more than had you made this distinction on the way out)
4) withhold more/make bigger quarterly estimates.
That’s pretty close to a comprehensive list of options. I’d probably just continue to auto invest and plan for the ‘hit’ out of my regular savings/bank account. It doesn’t sound like we’re talking about a 5-figures amount, so if you’re able to make these contributions to a taxable account, you’re probably saving enough to just pay them out of your regular cash flow for the foreseeable future.
If you inherit a big amount or have some other windfall where the amount in taxable is costing you enough that it does hurt your cash flow, consider yourself very lucky first, and learn how to sell old lots or get good at harvesting your losses to prevent the need to pay as much on your dividends. But generally in that position, you’ll need to sell some of your holdings. It’s not a terrible problem to have.
2) keep enough ‘regular’ cash to pay the taxes in checking/saving
3) sell some stock to pay the tax (if you aren’t careful and sell holdings you’ve held less than a year, you’ll raise your tax burden a bit more than had you made this distinction on the way out)
4) withhold more/make bigger quarterly estimates.
That’s pretty close to a comprehensive list of options. I’d probably just continue to auto invest and plan for the ‘hit’ out of my regular savings/bank account. It doesn’t sound like we’re talking about a 5-figures amount, so if you’re able to make these contributions to a taxable account, you’re probably saving enough to just pay them out of your regular cash flow for the foreseeable future.
If you inherit a big amount or have some other windfall where the amount in taxable is costing you enough that it does hurt your cash flow, consider yourself very lucky first, and learn how to sell old lots or get good at harvesting your losses to prevent the need to pay as much on your dividends. But generally in that position, you’ll need to sell some of your holdings. It’s not a terrible problem to have.
Posted on 8/13/23 at 10:26 am to thunderbird1100
quote:
The problem starts to arise when you owe maybe a grand or two or mores because technically they can charge you a penalty for underpayment throughout year. Doesnt sound like you're close to there yet though.
Small add on:
The general ‘penalty’ is the amount you owe + interest from when it should have been due based on about the current fed rate. It only begins to be calculated at $1000, but there are several exclusions that can apply. So let’s say you kill it and are $2000 behind, and you owed that back from the beginning of the year, the penalty would only be the $2000 you owe (not an additional $2000) + either 4 or 7% (I’m not sure which one applies From this table), but you’re talking $140 on the high end, $80 on the low.
I don’t ever want to pay a dollar more than I have to, but we have had to pay underpayment penalties before. It’s very reassuring when you fine out how relatively minimal they are. Again, don’t TRY to get one. And they’re not worth the inherent risk to use as leverage in the market, particularly given the any-month risk of downturn in investments (imagine using all/some of your money in even VSTAX instead of paying your taxes on time and having the Feb/March 2020 losses of the money you need for your taxes- no huge deal for 5, 10, 30 years from now. But months? Always be prepared for a 10-50% loss that won’t return for a couple of years). But don’t think that they’re an absolute “end of the world” type fine, should you make mistakes like we have along our journey to attempting to understand the tax code.
Posted on 8/13/23 at 11:05 am to lynxcat
quote:
What does this even mean? Bunch of word salad.
You've got your solution. Keep increasing your w2 withholding.
Posted on 8/14/23 at 5:54 am to good_2_geaux
quote:
When you reinvest dividends and don’t sell any shares, there shouldn’t be any tax consequences at that time.
Lol, wut?
Dividends are taxed whether you get cash or reinvest. If you sell shares, you also pay capital gains tax. If you sell shares before the dividends are qualified, the dividends are taxed as income.
Posted on 8/14/23 at 7:26 am to thunderbird1100
quote:
The problem starts to arise when you owe maybe a grand or two or mores because technically they can charge you a penalty for underpayment throughout year.
When does that penalty kick in? I either haven’t seen it or must be missing it. My taxable account generates over $10K in dividends/ capital gains per year at this point. It usually takes me from getting a refund to owing on taxes. Is there a point where you need to start paying quarterly tax?
Posted on 8/14/23 at 8:14 am to Vols&Shaft83
Missed it was a taxable account.
Posted on 8/14/23 at 9:22 am to good_2_geaux
I don't know man maybe it's time to hire an accountant
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