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Subject:  Need tax consequences advice please Date:  1/27/2013  10:28 PM
Author:  csm1rr Number:  117563 of 130968

Right now I have money in Merrill Lynch and Fidelity TRUST accounts that I will be investing. My first goal is to invest in items that pay dividends and then use the dividend money to add to my SS income AND not make a big tax paper mess for myself.

I am hoping to be doing my own tax return in 2013 after 20 plus years of having it done by a CPA.

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.

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. Or will these 2 CEFs send some kind of simple? paperwork and tell me what, if anything, I need to do on the 1040 tax forms? I'm guessing that the income produced by tax free CEFa in the account will not appear on the Merrill Lynch 1099 form. Or does Merrill Lynch send me the required documents for tax free income I earned and tell me what to do? IS IT a tax paperwork nightmare to hold NUV and/or KTF in a Trust investment account?

Also 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.

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 VYM and/or VIG will create a future tax paperwork nightmare? OR if I do buy either of these 2 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 then the end result of that form gets put on some line or lines of the Form 1040. OR does ETFs cause extra paperwork for me at tax time?

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 and/or CEFs 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?

Knowing how bad the tax paperwork would become before I purchase any of these funds would be extremely helpful! I am NOT considering any other CEFs or ETFs other the ones I mentioned above. If the tax paperwork for holding these type of funds in a TRUST account can only be done correctly by a CPA, then I will seriously consider NOT buying either of these funds.

Answers to these questions will be greatly appreciated!
Thank you,
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