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I have been looking all over to find an answer and everything I am looking at looks way over complicated.

I live in Maryland USA

I want to invest $1000 a month into a stock that pays dividends quarterly.

Lets say the stock price fluctuates between $40 and $60 dollar a share.

The Dividend payout price is 50 cents per share quarterly

I will purchase on the 1st of every month no matter the price.

ie.

  • January - $1000 at $40 a share giving me 25 shares
  • February - $1000 at $45 a share giving me 22 shares $10 left over
  • March - $1010 at $50 a share giving me 20 shares $10 left over
    • $23.50 on 47 shares from March 1st Dividend
  • April - $1033.50 at $50 a share giving me 20 shares $33.50 left over
  • May - $1033.50 at $45 a share giving me 22 shares $43.50 left over
  • June - $1043.50 at $40 a share giving me 26 shares $3.50 left over
    • $54.50 on 109 shares from June 1st Dividend
  • July - $1058 at $45 a share giving me 23 shares $23 left over
  • August - $1023 at $50 a share giving me 20 shares $23 left over
  • September - $1023 at $60 a share giving me 17 shares $3 left over
    • $89 on 178 shares from September 1st Dividend
  • October - $1092 at $55 a share giving me 19 shares $47 left over
  • November - $1047 at $55 a share giving me 19 shares $2 left over
  • December - $1002 at $50 a share giving me 20 shares $2 left over
    • $115.5 on 231 shares from December 1st Dividend

Total Invested - 12282.50

At the end of December I should have $12552

Dividend Payout time

  • March 1st - 50 cents a share currents shares 47 adding $23.5
  • June 1st - 50 cents a share currents shares 109 adding $54.5
  • September 1st - $1000 at $40 a share giving me 178 adding $89
  • December 1st - $1000 at $40 a share giving me 231 adding $115.50

On January 1st of the following year I want to withdrawal $1000

How much of that $1000 would I have to pay taxes on?

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  • 2
    Tax laws vary around the world, so tax questions require a jurisdiction. Where in the world are you? Please comment, edit your question or add a tag.
    – Vicky
    Jan 3 at 17:43
  • @Vicky edited, thank you Jan 3 at 17:54

2 Answers 2

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Tax rates depend on your overall income, so we can't precisely calculate it for you.

But, given that you intend to hold the stock indefinitely and it qualifies for the preferential dividend treatment (most are), you can use the capital gains rate bracket to estimate how much tax would be applied to the dividends depending on the rest of your income.

If the company doesn't qualify for the preferential treatment then the dividends are added to the rest of your income taxed at ordinary rates (regular tax brackets).

Similarly when you sell the shares - if you've held them for more than a year, it's capital gains rates. Less than a year - ordinary income rates.

Read more in the IRS publications, start with Publication 17 and Publication 550.

In addition to the Federal tax explained above, Maryland charges state income tax. AFAIK there's no special treatment for capital gains or qualified dividends for the state tax purposes, all income is taxed at the same rates.

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Tldr: Cost Basis.

If I understand the question correctly, you want to know how much of that $1000.00 you took out on Jan 1 is taxable, not necessarily what your tax rate will be. Your rate depends on too many unknown factors, one of which being how good your accountant is. What’s taxable is a little easier, but there are always factors a good accountant can use to increase or decrease what the IRS considers taxable.

First, understand the IRS is interested in your profit or gain, not the total dollars you received in a sale. And they are interested in any gain made in a given year, including dividends. In your example, we’re talking about two different years. The year you made your investment and the year you sold some of your investment to get that $1000.00. Since dividends are considered gains, you will have to pay taxes on them. Those are generally taxed as “ordinary dividends” at your income rate for the year you received those funds, even though those funds were reinvested and you really didn’t see any of that money.

Dividends aside, how do you know how much of your $1000.00 will be taxed? Cost Basis. Cost Basis is the average you paid for the shares you’ve sold. If the Cost Basis for the shares you’ve sold is less than 1000.00 then you’ve made a gain and the IRS wants their piece. What percentage that piece is, is what you hire an accountant for.

You have a three ways to calculate Cost Basis, and an accountant can help with this also.

First, by default, the IRS will assume FIFO (First-In First-Out). This means that the IRS will assume you’re selling the first shares you purchased and use the purchase price of those shares to calculate the cost basis. If the selling price of your shares on Jan 1 are $50.00, and you sell 20 shares to make your $1000.00 “withdraw”, then the cost basis for those 20 shares is $40.00 / share, the price you paid in January, because you purchased those “first”. You made $10.00/share profit, congratulations the IRS wants their cut from the $200.00 gain. $10.00 gain per share * 20 shares = $200.00 total gain.

Second, you can calculate Cost Basis using SSI, specific share identification. If you or your brokerage can identify the specific shares you are selling then you can calculate the cost basis on the purchase price of those shares. All brokerages I’m aware of require you make this designation before you sell your stock, not after. I know that Schwab allows for reporting based on Last-In First-Out, but I think that’s all they will allow.

A third method of Cost Basis is Average Cost. This calculates a basis on the average price of all shares held, regardless of holding period. Average Cost is a special rule for calculating cost basis for mutual fund purchases. IRS publication 550 covers this rule and a few cost basis examples.

Brokerages will most likely show you the average cost basis on their portal. They may even help calculate different Cost Basis’ at the time you sell your shares, depending on who your broker is. In the end how you calculate Cost Basis is the key to determining what your gain is, and it’s your gain, or profit, the IRS is interested in, not the amount of money you received from the sale.

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  • I don't think average cost is allowed for stock shares, only for mutual funds. I also don't think an accountant is necessary for this scenario.
    – littleadv
    Jan 4 at 7:07
  • @littleadv very correct. answer edited.
    – am21
    Jan 4 at 12:51
  • The statement I get from my broker at the end of the year includes all the information I need to file taxes, for each transaction and summarized per equity. They assume FIFO unless I've specified otherwise. So, honestly, I've stopped bothering to manually calculate the tax implications.
    – keshlam
    Jan 4 at 14:01
  • @keshlam: The end of year statement is of course much too late to pay the taxes. Quarterly estimated payments are due on 1099-DIV and 1099-B income (and many other types, but these two are relevant to the question).
    – Ben Voigt
    Jan 4 at 14:35
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    @BenVoigt: depends on how much you care about precision. If you just go for the safe harbor number, there's no quarter by quarter calculation needed. Or if you have adjusted withholding from salary to cover the expected gains, which is what I did when I was getting a salary. Or if you are willing to just pay the penalty, which I've sometimes done.
    – keshlam
    Jan 4 at 15:47

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