The Ungrateful Son

Hi Scott,

My dad is offering me $25k worth of AFI shares to put in my portfolio. Sounds good but I was wondering what effects this would have on my tax. I take home $700 a week after tax.Thanks,

Nicholas

Nicholas,

Hang on a minute.

Your old man is giving you $25k in AFIC shares and you’re worried about your tax position!?

Let me explain how it works:

Let’s say AFIC makes $1 of profit, and pays 30 cents in tax. The remaining 70 cents in a dividend. When you do your tax return, you’ll declare 70 cents of income, plus 30 cents in tax credits for what AFIC have already paid. You’ll pay tax on the $1 at your marginal rate of 32.5 cent in the dollar. In other words, you’ll still get a post-tax dividend of 67.5 cents.

And if you want the benefit of compound interest, you should tick and sign the Dividend Reinvestment Plan letter that will be sent to you in the mail, which will automatically recycle your dividends into more AFIC shares, generally at a discount to the market price and without incurring brokerage.

In short, I’d suggest that the next time you see your father say something like this: “Dad have you been working out? Because you look amazing!” Then wash his car. Then thank him for giving you a financial headstart that most kids never get.

Scott

Reminder: I first wrote about this years ago and highlighted the low costs. Today there are better deals on offer. How do I know? Because my readers constantly email me about them! So before you do anything, do a quick google.