Vanguard tax question

[evanc]

 My understanding was that if investment gains went unrealized  in a given year ( I.e. no withdrawals were made -  cost basis is in after-tax dollars ),  then no federal income tax was due.  Is this correct?

 The reason I am asking, I received a 1099-DIV  statement for my brokerage account, which I opened during 2016.   Now the IRS wants to collect federal income tax on "ordinary dividends," even though  I never made a single withdrawal. Where am I going wrong here?

 If it makes any difference, 100% of my holdings are in VTSAX. Thanks Mustachians

[Aggie1999]

You got paid dividends which are counted as income that you must pay taxes on (depending on your tax bracket). If it all came from VTSAX though it seems like the dividends should be qualified, not ordinary, since VTSAX is American and you haven't sold anything, thus meeting the holding period. Someone else with more knowledge of VTSAX dividends can speak up.

[jwright]

Nope, unless it's a tax deferred account you pay tax on the money when received.  You are a cash basis tax payer.  When the dividend was collected, it increased the balance in the account and you had access to it, even if you didn't withdraw.

Unrealized capital gains are not taxable because you haven't sold them and therefore don't have receipt. 

[Nothlit]

VTSAX pays quarterly dividends, which are taxable even if you have chosen to automatically reinvest them rather than have them withdrawn to your bank account. Capital gains, on the other hand, are not taxable until you sell.

Agreed with Aggie that VTSAX dividends should be mostly qualified, not ordinary.

[dandarc]

I think you have to have held the shares for 60 days for the dividends to be qualified?

[MustacheAndaHalf]

Yes, you must hold the stocks/funds for over 60 days that include the dividend date.
https://www.irs.gov/publications/p17/ch08.html#en_US_2016_publink1000171584

I think OP might be reading 1099-div incorrectly.  The "Qualified Dividends" (Box 1b) are actually included in the "Total Ordinary Dividends" (Box 1a).  If you see $90 in qualified dividends and $100 in total ordinary dividends, you are actually seeing $10 taxed at ordinary rates and $90 taxed as qualified dividends.

If you are reading 1099-div for the first time, it might look like "ordinary dividends" and "qualified dividends" are two separate categories with two separate totals.  They are not.  To quote the IRS, "Box 1b. Shows the portion of the amount in box 1a that may be eligible for reduced capital gains rates."
https://www.irs.gov/pub/irs-pdf/f1099div.pdf
(from page 5, description for "Box 1b")

[evanc]

VTSAX pays quarterly dividends, which are taxable even if you have chosen to automatically reinvest them...

 OK, so if I'm tracking, then when I do (let's say years from now) withdraw money out of the account, I won't have to pay tax for a second time on those dividends, since I already paid tax Previously?

[Spork]

VTSAX pays quarterly dividends, which are taxable even if you have chosen to automatically reinvest them...

 OK, so if I'm tracking, then when I do (let's say years from now) withdraw money out of the account, I won't have to pay tax for a second time on those dividends, since I already paid tax Previously?

You won't pay tax again on the DIVIDENDS.  If you re-invested the dividend at cost basis X and you withdraw (sell) them some day at X+Y... you WILL have to pay taxes on the capital gains.

Dividends and cap gains are taxed similarly... but they are 2 different things.  I think you're trying to make them one thing.

[Hargrove]

So you buy Stock X.

X means "This stock, at this time, at this cost."

If you sell Stock X, you pay taxes on any amount greater than that stock's cost at the time you purchased it.

If Stock X pays a dividend, when it pays the dividend, that is income. You pay taxes on that.

If that income is reinvested into the stock market, the payment to you is still a taxable event. If you then reinvest, you have Stock Y.

Stock X will sell, if you ever sell it, with taxes judged from the cost of that stock when you bought it.

New Stock Y will sell with taxes judged from the new cost of the stock when you bought much later with the dividend reinvestment.

Every dividend event is creating a new stock position when you reinvest, even with the same ticker, and a new taxable event, and all dividends paid will keep doing this. New stock won't be "taxed twice" because your taxable gains are only counting from the price of each new position purchased. You only get capital gains tax on money above that new purchase price on that new quantity of stock.

[evanc]

 Thanks, everyone, for the breakdown. Makes so much more sense now.

[ENT Doc]

Note also that the qualified div and LT cap gains tax rates can be 0% if your taxable income is in the 10 or 15% tax bracket.  This is important in retirement planning, as one can live off div income and pay next to nothing (if not zero) federal taxes.  State taxes will be different.  There is a later post on the tax thread showing the different state tax rates for these FIRE scenarios.  Worth a look.

[BTDretire]

VTSAX pays quarterly dividends, which are taxable even if you have chosen to automatically reinvest them...

 OK, so if I'm tracking, then when I do (let's say years from now) withdraw money out of the account, I won't have to pay tax for a second time on those dividends, since I already paid tax Previously?

You won't pay tax again on the DIVIDENDS.  If you re-invested the dividend at cost basis X and you withdraw (sell) them some day at X+Y... you WILL have to pay taxes on the capital gains.

Dividends and cap gains are taxed similarly... but they are 2 different things.  I think you're trying to make them one thing.

  Is Vanguard keep track of this for me?

[Spork]

VTSAX pays quarterly dividends, which are taxable even if you have chosen to automatically reinvest them...

 OK, so if I'm tracking, then when I do (let's say years from now) withdraw money out of the account, I won't have to pay tax for a second time on those dividends, since I already paid tax Previously?

You won't pay tax again on the DIVIDENDS.  If you re-invested the dividend at cost basis X and you withdraw (sell) them some day at X+Y... you WILL have to pay taxes on the capital gains.

Dividends and cap gains are taxed similarly... but they are 2 different things.  I think you're trying to make them one thing.

  Is Vanguard keep track of this for me?

You'll get a 1099-DIV for dividends received over the last year.  If you sell mutual funds, you'll get a 1099-B.

In short: yes, if your mutual funds were purchased after 2011.  Prior to that date, all bets are off.  You probably want to keep track of your cost basis no matter what.  (2011 was the start of the IRS requiring brokerages to keep track of your cost basis.)