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Author: csm1rr Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121114  
Subject: Dividend Stocks or Dividend ETFs Date: 1/25/2013 4:06 PM
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Hello, I was advised to place this post on this board so please pardon the cross post.
I am familiar with individual stocks and mutual funds and how we receive year end statements listing all the different gains / losses for the year and the 1099 forms we usually receive by Jan 31 for the past tax year. My family did have a Family Limited Partnership but it is now dissolved. I know about the K-1 and that it takes a CPA professional to prepare Partnership and personal tax returns. A professional will be doing the 2012 tax returns. I am hoping to be doing my own tax return in 2013.

Right now I have inherited money that is in 3 accounts, all 3 accounts are labeled as my full name TRUST and I am the trustee. One account is a checking account, one account is at Merrill Lynch and the third account is at Fidelity. Everything is in cash among these 3 accounts at this point. The money in the Merrill Lynch and Fidelity TRUST accounts is what I will be investing. My main source of income is a monthly disability check from Social Security and often that check is spent before the month ends while living within a modest budget. My first goal is to invest in items that pay dividends and then use the dividend money to add to my income AND not make a big tax paper mess for myself.

At first I thought about using TAX FREE funds such as NUV (Nuveen Municipal Value Fund) and KTF (DWS Municipal Income Trust). Then I found out that those 2 funds were Closed End Funds, not Mutual Funds. While researching CEFs, I discovered that CEFs can contain Partnerships and REITs. That made me think that using these 2 CEFs would probably complicate my tax paperwork instead of making it easier.
AM I CORRECT? is my first question.

Then I was looking at long term dividend paying stocks: Johnson & Johnson, Procter & Gamble, Coke Cola, McDonalds and such to start as core stocks. Then I ran across the idea about Exchange Traded Funds that hold good long term dividend paying stocks. The 2 ETFs I am considering to purchase when the price become a discount instead of a premium, are VYM (Vanguard High Dividend Yield ETF) or VIG (Vanguard Dividend Appreciation ETF) By this time I had found the Mötley Fool website, joined SA and a week later joined Supernova...and broke my own budget by several miles, but believe it will be worth it in the long run.

I researched about ETFs a lot on the Mötley Fool website and it looks to me that I could save my trust account some money by purchasing VIG or VYM instead of each dividend paying stock individually to start my core.
(I am pretty much a buy and hold investor unless fundamentals of what I own changes.)

Is anyone here able to tell me if buying either of these 2 ETFs will create a future tax paperwork nightmare? OR if I do buy either of the 2 mentioned ETFs in my trust account at Merrill Lynch, will the ETF earnings just show up on the Merrill Lynch 1099 next January along with the financial info about any stocks I also own in that account?

Will I need to do anything more than to report the ETF dividend gains along with the stock gains on the tax forms? I forget the form number, the one that reports short term gains / losses and the long term gains / losses and end result of that form gets put on some line or lines of the Form 1040 or Form 1040EZ....sure would be nice to use the 1040EZ, if that is possible, for my 2013 taxes.

I believe that as long as I take out the gains or earnings from my trust account and report it as income on my personal tax forms, I do not have to do a TRUST income tax return as well as the personal tax return. NOT having to do a TRUST tax return in the future is a goal and 2013 will be the first full tax year for this trust. Hence the tax paperwork questions with ETFs in an investment account.

IF using ETFs does NOT create a tax paperwork nightmare, would there be any advantage to buying both VYM and VIG?

Answers to these questions will be greatly appreciated!

Carolyn
Who hopes to make shorter posts with her questions in the future.
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