Reporting Dividends on Your Taxes

It’s tax time! If you have earned money from dividends in the past tax year, you will need to report that income. The IRS expects that you will report all of your income on your tax return, and dividend income is no exception. Reporting your dividends is fairly straightforward.

Form 1040, Line 9

There is a space for you to fill in your dividend earnings on the front side of your Form 1040, on Line 9. This income will affect your adjusted gross income (AGI). It’s important to keep track of this income. Luckily, it should be reported to you on the 1099-DIV statements you should receive from each company reporting dividends.

As you report your dividends, you will notice that there is a Line 9a and a Line 9b. Your ordinary dividends belong on Line 9a. It is important to note that all dividends are considered “ordinary.” Line 9b is for qualified dividends. These dividends are those that are taxed at the long-term capital gains rate, rather than being taxed as regular income. This can help you lower your tax liability.

You can figure out whether or not your dividends are qualified by checking your 1099-DIV. Ordinary dividends are listed in box 1a, and qualified dividends are listed in box 1b. Add up the totals from each of your 1099-DIV forms and put the totals in the appropriate lines on your tax form.

Schedule B

Realize, too, that you will have to file a Schedule B with your Form 1040 if you receive more than $1,500 in dividend income. Once you reach this point, you will need to detail your dividend earnings.

You should note that your interest earnings are also reported on Schedule B if they exceed $1,500. You don not total interest earnings with dividend earnings. It is important to make this distinction. You only have to fill out the Schedule B if one or the other is at least $1,500. This means that if you have $1,400 in dividend earnings and $350 in interest earnings, you will have no need to file a Schedule B. The total of the two may exceed $1,500, but since you don’t have to add them together, and neither of them reach the threshold, there is no reason to file a Schedule B.

As always, if you have questions about what you should file, and how you should report your earnings, it is a good idea to talk to a tax professional.

Pad Your Emergency Fund with Earnings from Dividend Stocks

One of the most important things you can do for your personal financial situation is to build up an emergency fund. An emergency fund can provide you with a source of money when you run into tough economic times. Having stable cash flow with dividends can also be helpful, but you might not have built up enough to cover all of your expenses. Until you reach a point where your dividend earnings can cover your income needs, it is important to have a back up plan in the form of an emergency fund. Honestly, you should have an emergency fund anyway – just in case your dividends are cut.

Using Dividend Earnings to Pad Your Emergency Fund

One way you can help build up an emergency fund, without taking as much money away from other things you find important, is to use the money from your dividends. When you start building up an income portfolio using dividend stocks, you are unlikely to earn a great deal at first. You can divert some of those earnings (or even all of them) into your emergency fund. This will help you pad your emergency fund while, at the same time, helping you develop your income stream from monthly dividends.

If you lose your job, or suffer some other financial catastrophe, the money you have build up in your emergency fund will help you meet your expenses. And, because you have been building an income portfolio during that time, you will also have a cultivated source of dividends income. This may not completely replace the income that you had, but it will help immensely as you look for other sources of cash flow.

You can maximize your emergency fund by keeping it in a high yield savings account, or developing a CD ladder. While the interest you earn from these types of savings products will not be great, it will still often beat what you would get with a traditional savings account. There are other types of accounts you can consider for your emergency fund, including interest bearing checking accounts and some types of bond funds. (There are some bond funds, like GNMA, that allow you to write checks.) However, you need to be careful since bond funds will not be FDIC protected. One of the points of having an emergency fund is that it is accessible and it is protected so that you get your money back if something happens to the financial institution.

Your dividend earnings can be a great way to fund an emergency savings account. Dividend earnings represent a regular source of income, and can be used to help you improve your financial stability.

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When Can I Retire

One of the pressing money questions that many people have is the following: When can I retire? Retirement means something different to each person.

When figuring out when you can retire, it is important to consider what your idea of retirement is, and then focus on making your own personal vision of retired life come true. With the right planning, you should be able to live the life you want after you retire.

There are a few items to consider as you attempt to answer the question, when can I retire?

  • What you want to do.
  • How much money you have now.
  • What you save in order to have what you need later.
  • Your debt obligations, and how fast you can pay them down.
  • Your regular expected expenses (groceries, utilities, etc.).
  • How you spend your money.
  • The lifestyle you want during retirement.
  • Where you expect your income to come from.

Keep these considerations in mind as you make your plans. They will help you stay focused at each stage of the planning, providing guidance.

Understanding What You Need to Retire

Your first step is deciding what you need to retire. Consider your expected expenses, as they relate to what you want to do when you stop working. Someone who wants to downsize and move into a retirement community, while adopting an inexpensive hobby and traveling only occasionally to visit family has completely different needs that someone who wants to travel the world, living in various countries for extended periods of time.

retired couple Think about what you want you want to do, and estimate what it will cost to make it happen. You can use your current expenses as a good baseline. You can assume that your utility costs, housing costs and some of your other costs will be somewhat similar. If you plan to have your home paid off by the time you retire, you can consider what you might do with a monthly mortgage payment you no longer have to make. It could go toward paying rent in another country, or for airplane tickets.

Many people figure that they will have expenses similar to what they pay now during retirement; careful wealth management means that they simply change what they are spending their money on as they approach retirement, paying off obligations so that the money can be spent on other pursuits.

How Much Money Do You Need to Retire?

Rather than thinking about amassing one huge nest egg, it can be helpful to think of your retirement needs based on monthly income. When can I retire? is a question that depends on when you will have the monthly income you need to keep things going. This income can come from what you earn from your retirement accounts as well as from sources of passive income that you might have cultivated.

Many people try to accumulate $1 million when they retire. If you manage to build a nest egg with $1 million, and you withdraw 4% a year, that’s $40,000 a year – about $3,333.33 a month. Is that going to be enough for you to meet your dreams when you retire? For some people, especially those who have no debt and are careful about their expenses, that is more than enough, even when travel is involved.

You can figure in Social Security as well. Look at your most recent Social Security statement to see your estimated benefit, and when it starts. It might be that if you wait on a sufficient Social Security benefit, you will be much older when you retire. Or Social Security may not even be around when you retire.

At any rate, add up your expenses, and decide how much money you need each month to live on. If you decide that you will need $4,500 to live on, you can see that simply amassing $1 million in your nest egg isn’t going to do it – unless you are willing to withdraw more than 4% each year, running a greater risk of running out of money before you run out of retirement. By planning now, you can begin to develop the resources that will help you enjoy a successful retirement.

Developing a Monthly Income for Retirement

Part of your retirement plans should revolve around building up a nest egg in tax advantaged retirement accounts. 401ks and IRAs are great tools that can help you put your money to work for you. You can use an online retirement calculator to see how long it would take you to get the nest egg you are looking for. These calculators will also help you estimate how much money you will need to set aside each month if you want to retire at a certain age. You then need to decide what you are willing to give up now for a better retirement later.

You can also consider building alternative income streams now that will be available later. This type of income diversity can be helpful in the event that there is a stock market crash just before your retirement. Instead of finding almost your entire retirement income at the mercy of the whims of the market, you can have supplemental sources of income. Alternative income streams can include income from a business, real estate, a web site or the best dividend paying stocks.

Another benefit to cultivating alternative income streams is that you can retire sooner. If you withdraw funds from a tax advantaged retirement account early, you will have to pay penalties. And, in order to get better Social Security benefits, you need to wait longer. If you have alternative income, you can begin the process of retirement sooner, since you will have money, penalty-free, at an earlier date.

Really, the key to answering the question, When can I retire? is figuring out when you want to retire, and then making it happen. Decide when you would like to retire, and begin setting aside money, paying down debt and cultivating multiple income streams so that you can reach your goals.

Do You Know Your Return on Investment?

Any time you invest in something, you should figure our your return on investment (ROI). Your return on investment shows you how long it will take you to recoup your initial investment, as well as provide you with a basis of comparison moving forward. Figuring your ROI is an important part of doing your homework and deciding whether or not to continue with an investment. This is true of dividend stocks.

How to Figure Your ROI on Dividend Stocks

Members Only in dividend stocks, you need to figure your ROI based on the appreciation in the stock price, as well as what you earning in dividends. Some people neglect to consider these two items together. When you are focused on the dividends you are earning, and your income stream, you tend to forget that you have bought a stock, and that stock is affected by the market, gaining or losing in price independent of what you are being paid as a dividend.

Let’s say that you purchase a stock for $50 a share. The dividend yield is 4%, so you end up with $2 a year. Over the course of the year, your stock improves in price by $8, bringing the total to $58. Add your $2 dividend, and you find that your total is $60. Now, you haven’t earned $60 in profit; you have to subtract the original share price from your total. Your profit is actually $10. You divided that $10 by your initial investment of $50 to get 0.2. Multiply that by 100 to get a percentage: 20%.

Now that you know your ROI, it is time to use that information to determine how long it will take you to recoup your original $50 investment. You simply divide 100 by 20 to get 5. It will take you approximately five years to recover your initial investment when you consider the dividend plus the gain in stock price.

Things to Be Aware Of

Of course, there are items that can change the way you earn a return. Stock prices may not always go up. Indeed, three years in, the price might drop. Additionally, the company might cut dividends, changing your ROI. You can refigure your ROI at the end of the year if you are interested in tracking trends in your dividend stock. If it appears that the ROI is diminishing at a fairly regular rate, it might be worth it to consider dropping the stock. Figure out why the ROI is falling. If it has to do with broad economic issues, it might be worth it to hold on. However, if it appears that other problems are surfacing with the company, it might be time to sell and move on.

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5 Perfect Dividend Stocks

Top 100 Dividend List

We have 5 stocks with perfect 100 point ratings from the top 100 dividend list this month.

There are plenty of other high rated stocks coming it at just below perfect and all are worth consideration. McDonalds just missed being perfect because of what we consider a less than perfect dividend growth rate and net income growth rate. Their yield is a little lower than we prefer at 3%, but still solid.

Each of the 5 stocks rated 100 points have a 5 year dividend growth rate over 10% and a 5 year net income growth rate over 10%. Each also has a one year return of 17% or more.

The leader of the pack, and our new #1 rated dividend paying stock has a yield of 8%, a dividend growth rate of 99% and a big one year return of almost 55%.

The healthcare stock rated 100 has only one possible flaw with its higher than normal payout ratio. This stock is actually a REIT so it gets a pass on the payout ratio.

Safe Dividend List

Our safe dividend list saw for the first time no 100 point rated stocks. The highest comes in at 99 points for February. The previously rated number one 100 point safe dividend stock fell to number 5 after it’s payout ratio went above 90.

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