Is income from VTSAX considered qualified dividend income?

[lifeplus]

Question 1: Is income from VTSAX considered qualified dividend income?

Question 2: Also, I found this great calculator (below) for calculating federal taxes owed on qualified dividend income, but I can't find a good one to calculate state tax (I'm in California). I've heard they charge a flat 15% on qualified dividend income, which seems crazy. Is this right? Is it a sliding scale, or is it flat on the entire amount.

Calculator: http://www.moneychimp.com/features/tax_calculator.htm

[terran]

Some (most) dividend income form VTSAX will be qualified by default, but can still be unqualified depending on how long you've owned it on either side of when the dividend was issued. As long as you've held it for 61 days either before or after the dividend was issued most of it should be qualified. Here's some good info on qualified dividends: https://www.fidelity.com/tax-information/tax-topics/qualified-dividends

I think California treats all dividends the same as regular income, so you'll owe state tax on the dividends at your marginal rate (doesn't matter whether they're qualified or not). I'm not certain about this, probably just saw someone else say it, so you'll have to research it, or see what happens when you file your taxes.

[lifeplus]

@terran I was talking with some other folks online about this and they said VTSAX and other Mutual Funds (held in taxable brockerage accounts) are taxed as Ordinary Income and not Qualified Dividends. QD's are only on individually held stocks.

Can you point me to information that supports that dividends from VTSAX are taxed as qualified income? For calculating FI the difference is massive. $0 on income under 80K federally in 2020.

[MDM]

@terran I was talking with some other folks online about this and they said VTSAX and other Mutual Funds (held in taxable brockerage accounts) are taxed as Ordinary Income and not Qualified Dividends. QD's are only on individually held stocks.

Can you point me to information that supports that dividends from VTSAX are taxed as qualified income? For calculating FI the difference is massive. $0 on income under 80K federally in 2020.

You might ask the "other folks online" to substantiate their incorrect claim.

Do you own VTSAX?  If so, look at the 1099-DIV you receive and note how much of the dividends are qualified.

[lifeplus]

@MDM Thanks for that note to check my 1099-div. I just received that (yes, I hold VTSAX, first year). I see that it's split nearly in 1/2 as ordinary and 1/2 as qualified. Is there any way to specify when the dividends come out? I'd love to see if there's a way to have the majority of them as qualified dividends for tax purposes. Or are we at the mercy of when the fund chooses to make those distributions?

[MDM]

@MDM Thanks for that note to check my 1099-div. I just received that (yes, I hold VTSAX, first year). I see that it's split nearly in 1/2 as ordinary and 1/2 as qualified. Is there any way to specify when the dividends come out? I'd love to see if there's a way to have the majority of them as qualified dividends for tax purposes. Or are we at the mercy of when the fund chooses to make those distributions?

It's more a case of what stocks a fund holds than when the fund makes distributions.  VTSAX itself had ~93.8% qualified dividends this year (see Total Stock Market Index - Section 199A dividends this year - Bogleheads.org).  Other funds will have had different percentages.

[terran]

Can you point me to information that supports that dividends from VTSAX are taxed as qualified income?

As @MDM pointed out, the other people you've heard from are incorrect. See the Fidelity link I provided above. It explains this things pretty well, I think.

@MDM Thanks for that note to check my 1099-div. I just received that (yes, I hold VTSAX, first year). I see that it's split nearly in 1/2 as ordinary and 1/2 as qualified. Is there any way to specify when the dividends come out? I'd love to see if there's a way to have the majority of them as qualified dividends for tax purposes. Or are we at the mercy of when the fund chooses to make those distributions?

It's more a case of what stocks a fund holds than when the fund makes distributions.  VTSAX itself had ~93.8% qualified dividends this year (see Total Stock Market Index - Section 199A dividends this year - Bogleheads.org).  Other funds will have had different percentages.

I think @lifeplus is probably referring to my comment that ones own holding period also effects whether mutual fund dividends are qualified in addition to the amount of qualified dividends the fund "naturally" has. As can be seen here, VTSAX distributes dividends quarterly in March, July, September, and December. If you buy within 61 days of one of those, just make sure you don't also sell within 61 days. This shouldn't really be a problem for a buy and hold investor because even if you buy too soon before a dividend you shouldn't be selling anytime soon anyway. The fact that 50% of your dividends are unqualified while, as @MDM points out, ~94% of VTSAX dividends should be qualified makes me wonder if you're selling frequently for some reason? It's also possible you'll get an updated 1099 later. For example, if you bought VTSAX shortly before the December dividend they can't yet know if those dividends are qualified for you since it's been less than 61 days at this point.

[lifeplus]

The fact that 50% of your dividends are unqualified while, as @MDM points out, ~94% of VTSAX dividends should be qualified makes me wonder if you're selling frequently for some reason? It's also possible you'll get an updated 1099 later.

@terran  I have never taken anything out of my VTSAX. At the beginning of every month I go into my Vanguard account and click "Buy & Sell" and I buy more shares of VTSAX. That's it. Nothing more. I thought that's what I was supposed to do. So far I'm happy with the gains on the overall fund. We have about 4 years before we reach FI so please let me know if I'm doing something wrong. Such as not buying in March, July, September, and December.

We started investing in VTSAX only about June of 2019. Maybe that has something to do with it.

[terran]

The fact that 50% of your dividends are unqualified while, as @MDM points out, ~94% of VTSAX dividends should be qualified makes me wonder if you're selling frequently for some reason? It's also possible you'll get an updated 1099 later.

@terran  I have never taken anything out of my VTSAX. At the beginning of every month I go into my Vanguard account and click "Buy & Sell" and I buy more shares of VTSAX. That's it. Nothing more. I thought that's what I was supposed to do. So far I'm happy with the gains on the overall fund. We have about 4 years before we reach FI so please let me know if I'm doing something wrong. Such as not buying in March, July, September, and December.

We started investing in VTSAX only about June of 2019. Maybe that has something to do with it.

In that case I'm guessing your 1099 will be updated sometime in February with qualified dividends closer the ~94% that @MDM mentioned above then.

[lifeplus]

@terran Thanks again.

Is this year typical of general VTSAX returns to be so high on the Qualified Dividends end?

Also, to confirm, no FICO (social security and medicare) taxes on VTSAX dividend income, correct?

If you live in a no state tax state (I don't, I live in CA), then you'd pay virtually no tax on VTSAX income, at least in 2019. That's crazy good. Why aren't more people talking about that aspect? i.e. YouTubers and Podcasters?

[MDM]

@terran Thanks again.

1. Is this year typical of general VTSAX returns to be so high on the Qualified Dividends end?

2. Also, to confirm, no FICO (social security and medicare) taxes on VTSAX dividend income, correct?

3. If you live in a no state tax state (I don't, I live in CA), then you'd pay virtually no tax on VTSAX income, at least in 2019. That's crazy good. Why aren't more people talking about that aspect? i.e. YouTubers and Podcasters?

1. Yes
2. Correct
3. QD are taxable at 15% federal to the extent your taxable income including QD (for 2020) is above $40K for single and $80K for MFJ.

[terran]

3. If you live in a no state tax state (I don't, I live in CA), then you'd pay virtually no tax on VTSAX income, at least in 2019. That's crazy good. Why aren't more people talking about that aspect? i.e. YouTubers and Podcasters?

3. QD are taxable at 15% federal to the extent your taxable income including QD (for 2020) is above $40K for single and $80K for MFJ.

And even better (especially once you retire) the Qualified Dividends and Long Term Capital Gains below those $40k/$80k thresholds are taxed at 0% (note that this includes income from other sources, so if you have earned income, pensions, social security, IRA withdrawals, or IRA to Roth IRA conversion, those can push some QDs/LTCGs up over those those limits).

[lifeplus]

@MDM You also get, at a minimum, the standard deduction on top of that which is an additional $12K for single and $24k for married filing joint so if all income comes in from QDs then, for a married couple, they could pull in $104k with zero tax, as I understand it. This is getting good!

those can push some QDs/LTCGs up over those those limits).

@terran Yup, and good news is the above and beyond is only taxed as what is over the threshold and not on the entire chunk. So many wins happening it's awesome.

Thanks for both of your help in understanding this. To be conservative in my FI number I'll use a higher ratio for VTSAX as ordinary income vs qualified dividends (40% Ordinary 60% Qualifed) and I should most likely be good, I think? Any thoughts against thinking this way? I'm already calculating the ugly California State taxes in my FI number calculations.

[terran]

Yes, I have a hard time imagining a passive index fund (like VTSAX or the international equivalent VTIAX) having more than 40% non-qualified dividends.

I looked at this earlier in 2019 for my tax planning and it seems a conservative estimate would be ~90% qualified for a total US stock index fund,
~80% qualified for total international stock index fund, and ~50% qualified for an emerging market stock index fund.

[MDM]

You also get, at a minimum, the standard deduction on top of that which is an additional $12K for single and $24k for married filing joint so if all income comes in from QDs then, for a married couple, they could pull in $104k with zero tax, as I understand it. This is getting good!

That's correct.  :)

That's also a big "if". ;)

[secondcor521]

@MDM Thanks for that note to check my 1099-div. I just received that (yes, I hold VTSAX, first year). I see that it's split nearly in 1/2 as ordinary and 1/2 as qualified. Is there any way to specify when the dividends come out? I'd love to see if there's a way to have the majority of them as qualified dividends for tax purposes. Or are we at the mercy of when the fund chooses to make those distributions?

I'm pretty sure you're misunderstanding your 1099-DIV.  And others on this thread are perpetuating the misunderstanding.

The qualified dividends reported on your 1099-DIV are a subset of, not in addition to, the ordinary dividends.  So if the ordinary dividend line says $1,000 and the qualified dividend line says $900, then that means you received $1,000 in dividends, of which 90% or $900 were qualified.  It does not mean, as you seem to think, that you received $1,900 in dividends and the split was approximately 55/45.

You can confirm this by going back to all of your Vanguard statements and adding up how much you received in dividends each month.  The total will be equal to the amount on the ordinary dividend line of your 1099-DIV.  You might also semi-confirm this by seeing what the qualified dividend line on your 1099-DIV divided by the ordinary dividend line on your 1099-DIV is - it will probably be between 90% and 100%, which is very typical of VTSAX and other Vanguard index funds.

You can also confirm this by seeing how the numbers you enter flow through your tax preparation program (Turbotax or whatever) or your CPA's results.  Although I don't know how to succinctly explain what you should look for, so I won't try.

[secondcor521]

Also, I'm fairly certain people are incorrect when describing how determining whether a dividend received from a mutual fund is qualified or not.  My understanding from when I researched this topic recently is that the determination is different between stocks and mutual funds.

If you own a stock that pays you a dividend, you need to maintain ownership of that stock for a certain amount of days; those span of days must fall with an certain larger range centered around the day the stock pays the dividend.  Otherwise, it is not qualified.

With mutual funds (which own stocks), they must meet the criteria for owning that stock that pays that dividend for the requisite number of days, in which case the dividend which they receive and pass along to you is qualified.  It is irrelevant how long you own the mutual fund.  You can buy the mutual fund the day before it pays the dividend and sell it the day after - as long as the mutual fund held the stock long enough, then the dividend can be qualified to you even though you may have only owned the mutual fund for two or three days.

Since VTSAX generally buys and holds stocks, the vast majority of their dividends are qualified.  This is generally true of all Vanguard stock index funds.  And generally true of any good stock index fund.

For this reason, I doubt you'll receive a modified 1099-DIV from Vanguard later as someone earlier posited.

[terran]

I'm pretty sure you're misunderstanding your 1099-DIV.  And others on this thread are perpetuating the misunderstanding.

The qualified dividends reported on your 1099-DIV are a subset of, not in addition to, the ordinary dividends.  So if the ordinary dividend line says $1,000 and the qualified dividend line says $900, then that means you received $1,000 in dividends, of which 90% or $900 were qualified.  It does not mean, as you seem to think, that you received $1,900 in dividends and the split was approximately 55/45.

Oh, good point. That can be confusing and it didn't occur to me, but that would explain it.

[MDM]

You can also confirm this by seeing how the numbers you enter flow through your tax preparation program (Turbotax or whatever) or your CPA's results.  Although I don't know how to succinctly explain what you should look for, so I won't try.

If VTSAX is the only dividend producer, then line 3a on https://www.irs.gov/pub/irs-pdf/f1040.pdf should be ~93.8% of line 3b.

[terran]

With mutual funds (which own stocks), they must meet the criteria for owning that stock that pays that dividend for the requisite number of days, in which case the dividend which they receive and pass along to you is qualified.  It is irrelevant how long you own the mutual fund.  You can buy the mutual fund the day before it pays the dividend and sell it the day after - as long as the mutual fund held the stock long enough, then the dividend can be qualified to you even though you may have only owned the mutual fund for two or three days.

This is incorrect (according to Fidelity):

Mutual funds
All of the following requirements must be met:

• The fund must have held the security unhedged for at least 61 days out of the 121-day period that began 60 days before the security’s ex-dividend date. (The ex-dividend date is the date after the dividend has been paid and processed and any new buyers would be eligible for future dividends.)
• For certain preferred stock, the security must be held for 91 days out of the 181-day period, beginning 90 days before the ex-dividend date. The amount received by the fund from that dividend-generating security must have been subsequently distributed to you.
• You must have held the applicable share of the fund for at least 61 days out of the 121-day period that began 60 days before the fund’s ex-dividend date.

So you're part right that the mutual fund's holding period dictates the maximum qualified dividends (this is the ~94% @MDM mentioned), but you you also have to hold the mutual fund for enough time before and/or after the fund pays its dividend(s).

[secondcor521]

With mutual funds (which own stocks), they must meet the criteria for owning that stock that pays that dividend for the requisite number of days, in which case the dividend which they receive and pass along to you is qualified.  It is irrelevant how long you own the mutual fund.  You can buy the mutual fund the day before it pays the dividend and sell it the day after - as long as the mutual fund held the stock long enough, then the dividend can be qualified to you even though you may have only owned the mutual fund for two or three days.

This is incorrect (according to Fidelity):

Mutual funds
All of the following requirements must be met:

• The fund must have held the security unhedged for at least 61 days out of the 121-day period that began 60 days before the security’s ex-dividend date. (The ex-dividend date is the date after the dividend has been paid and processed and any new buyers would be eligible for future dividends.)
• For certain preferred stock, the security must be held for 91 days out of the 181-day period, beginning 90 days before the ex-dividend date. The amount received by the fund from that dividend-generating security must have been subsequently distributed to you.
• You must have held the applicable share of the fund for at least 61 days out of the 121-day period that began 60 days before the fund’s ex-dividend date.

So you're part right that the mutual fund's holding period dictates the maximum qualified dividends (this is the ~94% @MDM mentioned), but you you also have to hold the mutual fund for enough time before and/or after the fund pays its dividend(s).

The great thing is when we're wrong, I know others will correct us.

You and Fidelity are correct.  For the dispositive answer, see IRS Pub 550, page 19, example 3 here:

https://www.irs.gov/pub/irs-pdf/p550.pdf

"Example 3. You bought 10,000 shares of ABC Mutual Fund common stock on July 5, 2018. ABC Mutual Fund paid a cash dividend of 10 cents per share. The ex-dividend date was July 12, 2018. The ABC Mutual Fund advises you that the portion of the dividend eligible to be treated as qualified dividends equals 2 cents per share. Your Form 1099-DIV from ABC Mutual Fund shows total ordinary dividends of $1,000 and qualified dividends of $200. However, you sold the 10,000 shares on August 8, 2018. You have no qualified dividends from ABC Mutual Fund because you held the ABC Mutual Fund stock for less than 61 days."

[MustacheAndaHalf]

Which I joined the "corrected by terran club" a year or so ago.  :)

@lifeplus - Besides the links above, there's another thing that falls into place when you understand the holding periods.  Why do companies wait for February to send out 1099-DIV, when your bank sends 1099-INT during January?

It's the holding period.  If you get a dividend on Dec 25th, and sell on Jan 20th, you did not hold the stock for 30 days after the dividend.  Selling in January can retroactively turn qualified dividends into ordinary income, because the holding period was violated.  Vanguard is waiting to see if you sell in January, and when you don't, they can mark the late December dividends as qualified.  That 30 day holding period (the 61 days centered on the dividend) is why 1099-DIV are waiting for February before being sent out.