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Wednesday, August 23, 2006

Minimizing Taxes - Keeping Track of Cost Basis for DRIP Purchases

Recently purchased a few shares of a stock using the DRIP plan. Since I am not sure if I will purchase additional shares over time, I decided not to reinvest dividends. The quarterly dividends that I earn require me to pay taxes in the year in which they are earned. This can cause potential problems down the road if I am not careful about keeping track of my reinvested dividends and adjusting my cost basis for share purchases accordingly. The reinvested dividends require me to pay taxes on it in the year in which they are earned, so in order to avoid paying taxes again later on when I sell my shares, I need to be careful about increasing my original cost basis to account for these reinvested dividends, otherwise I will end up paying more in taxes.

I find it easier to just withdraw the quarterly dividends to keep things simple. In addition, receiving the dividends every quarterly gives kind of a good feeling and can also act as a motivation for not withdrawing my money. I believe that it will be easier to keep track of cost basis when ever I put additional money in the plan to purchase additional shares.

posted by Ruby @ 10:26 AM

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