Author Topic: VTSAX question  (Read 8046 times)

cheapass

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VTSAX question
« on: February 04, 2016, 10:44:45 AM »
So I noticed that according to Google finance, the VTSAX yield is 1.98%. I'm assuming this means dividend yield.

So if I buy shares in a brokerage (non-tax deferred) account, and I choose to reinvest dividends, will I be paying tax on the dividends annually? Or at distribution?

NoStacheOhio

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Re: VTSAX question
« Reply #1 on: February 04, 2016, 10:53:14 AM »
Annually. It'll go on a 1099 at tax time.

FerrumB5

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Re: VTSAX question
« Reply #2 on: February 04, 2016, 10:53:24 AM »
Annually. At the time when you file your taxes (you will have to wait until after Feb 16) to finalize your return

cheapass

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Re: VTSAX question
« Reply #3 on: February 04, 2016, 10:54:39 AM »
God damn it. So as my investments grow, I'll keep getting taxed more and more and more. Thanks Uncle Sam.

Is the only way to avoid this to buy only funds that do not pay dividends?

Why is VTSAX so popular if people have to pay taxes on it annually?

FerrumB5

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Re: VTSAX question
« Reply #4 on: February 04, 2016, 11:01:08 AM »
You will be getting dividends no matter what market does: goes up or down. This is positive income and will be taxed

spud1987

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Re: VTSAX question
« Reply #5 on: February 04, 2016, 11:03:32 AM »
God damn it. So as my investments grow, I'll keep getting taxed more and more and more. Thanks Uncle Sam.

Is the only way to avoid this to buy only funds that do not pay dividends?

Why is VTSAX so popular if people have to pay taxes on it annually?

When you pay taxes on dividends you also received a basis "step up" in the amount of the dividend. This means that you will have a higher basis when you sell the investment and thus a small capital gain. Of course, this may not be as valuable to you during FIRE if you are below the threshold at which dividend/capital gains are taxed.

Another way to shelter dividend income is to tax-loss harvest during the year. For example, I just harvested about $1.5k in losses, which will shield all my dividend income for 2016.

Edit: another option would be to keep higher yielding investments in tax-advantaged accounts (IRAs, 401ks, etc.) since taxes are not paid on dividends until they are withdrawn. The downside is that the withdrawals will be taxed at ordinary income rates, which can be higher than the 20% dividend rate. But for most of us this won't happen during FIRE (due to our low incomes in retirement). I hold my REITs and certain other higher yielding investments in my IRAs and 401k. I hold lower yielding investments such as international funds in my taxable account.
« Last Edit: February 04, 2016, 11:09:09 AM by spud1987 »

BarkyardBQ

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Re: VTSAX question
« Reply #6 on: February 04, 2016, 11:07:09 AM »
God damn it. So as my investments grow, I'll keep getting taxed more and more and more. Thanks Uncle Sam.

Is the only way to avoid this to buy only funds that do not pay dividends?

Why is VTSAX so popular if people have to pay taxes on it annually?

You have to earn something to pay taxes on it, and the taxes are less than the earnings, so you still end up with more. This is good.

onlykelsey

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Re: VTSAX question
« Reply #7 on: February 04, 2016, 11:22:35 AM »
Quote
You have to earn something to pay taxes on it, and the taxes are less than the earnings, so you still end up with more. This is good.

This was my (Reagan-appointed) federal income tax professor's biggest pet peeve. Until we make 101% tax rates, earning more money is still a good idea.

In this particular instance, you get stepped up basis, which is great for you long term.

cheapass

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Re: VTSAX question
« Reply #8 on: February 04, 2016, 12:23:28 PM »
So all things being equal (returns, expense ratio, etc) would it be better to buy a fund that has no dividends, only capital gains? That way I could pay 0% capital gains tax when I'm retired instead of 15% dividends tax every damn year?

NoStacheOhio

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Re: VTSAX question
« Reply #9 on: February 04, 2016, 12:31:19 PM »
So all things being equal (returns, expense ratio, etc) would it be better to buy a fund that has no dividends, only capital gains? That way I could pay 0% capital gains tax when I'm retired instead of 15% dividends tax every damn year?

"All things being equal" yes, but all things are not equal.

BarkyardBQ

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Re: VTSAX question
« Reply #10 on: February 04, 2016, 12:31:51 PM »
So all things being equal (returns, expense ratio, etc) would it be better to buy a fund that has no dividends, only capital gains? That way I could pay 0% capital gains tax when I'm retired instead of 15% dividends tax every damn year?

It's best to invest for your allocation and objective, not try to modify your investments to fit a different objective. 15% of what? Taxable account should be the last place you invest if you have tax deferred buckets. Invest in foreign markets (VTIAX) in your taxable account, and get foreign tax credits on those dividends. Invest in US and higher growth/dividend funds in tax deferred accounts.

https://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement


Jack

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Re: VTSAX question
« Reply #11 on: February 04, 2016, 12:34:29 PM »
Quote
You have to earn something to pay taxes on it, and the taxes are less than the earnings, so you still end up with more. This is good.

This was my (Reagan-appointed) federal income tax professor's biggest pet peeve. Until we make 101% tax rates, earning more money is still a good idea.

For that discussion, head to the "tax cliffs" thread.

cheapass

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Re: VTSAX question
« Reply #12 on: February 04, 2016, 12:52:27 PM »

It's best to invest for your allocation and objective, not try to modify your investments to fit a different objective. 15% of what? Taxable account should be the last place you invest if you have tax deferred buckets. Invest in foreign markets (VTIAX) in your taxable account, and get foreign tax credits on those dividends. Invest in US and higher growth/dividend funds in tax deferred accounts.

https://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

I've got my taxable accounts maxed out with basically S&P index funds. Thanks for the link I will check it out!

Interest Compound

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Re: VTSAX question
« Reply #13 on: February 04, 2016, 03:25:00 PM »
So all things being equal (returns, expense ratio, etc) would it be better to buy a fund that has no dividends, only capital gains? That way I could pay 0% capital gains tax when I'm retired instead of 15% dividends tax every damn year?

It's best to invest for your allocation and objective, not try to modify your investments to fit a different objective. 15% of what? Taxable account should be the last place you invest if you have tax deferred buckets. Invest in foreign markets (VTIAX) in your taxable account, and get foreign tax credits on those dividends. Invest in US and higher growth/dividend funds in tax deferred accounts.

https://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

Some years VTSAX is more tax-efficient, and some years VTIAX is more tax-efficient. It's hard to tell ahead of time, so I'd say they are equally good in a taxable account.

:)

MrStash

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Re: VTSAX question
« Reply #14 on: February 05, 2016, 11:29:55 AM »
If you are in the 10% or 15% tax brackets, aren't ordinary qualified dividends taxed at 0% anyway?

So, basically all of this only matters if you made more than $37,450 (single) or $74,900 (married) in 2015. I come in right under the married threshold, so I'm shielded from tax on my VTSAX dividends. :)

Unless some of you would like to burst my bubble with some rule I'm not aware of?

BarkyardBQ

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Re: VTSAX question
« Reply #15 on: February 05, 2016, 11:33:35 AM »
So all things being equal (returns, expense ratio, etc) would it be better to buy a fund that has no dividends, only capital gains? That way I could pay 0% capital gains tax when I'm retired instead of 15% dividends tax every damn year?

It's best to invest for your allocation and objective, not try to modify your investments to fit a different objective. 15% of what? Taxable account should be the last place you invest if you have tax deferred buckets. Invest in foreign markets (VTIAX) in your taxable account, and get foreign tax credits on those dividends. Invest in US and higher growth/dividend funds in tax deferred accounts.

https://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

Some years VTSAX is more tax-efficient, and some years VTIAX is more tax-efficient. It's hard to tell ahead of time, so I'd say they are equally good in a taxable account.

:)

Our taxable account is 50/50 :)

If you are in the 10% or 15% tax brackets, aren't ordinary qualified dividends taxed at 0% anyway?

So, basically all of this only matters if you made more than $37,450 (single) or $74,900 (married) in 2015. I come in right under the married threshold, so I'm shielded from tax on my VTSAX dividends. :)

Unless some of you would like to burst my bubble with some rule I'm not aware of?

AGI or MAGI?
« Last Edit: February 05, 2016, 11:35:06 AM by BackyarBQ »

Jeremy E.

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Re: VTSAX question
« Reply #16 on: February 05, 2016, 11:39:48 AM »
If you are in the 10% or 15% tax brackets, aren't ordinary qualified dividends taxed at 0% anyway?

So, basically all of this only matters if you made more than $37,450 (single) or $74,900 (married) in 2015. I come in right under the married threshold, so I'm shielded from tax on my VTSAX dividends. :)

Unless some of you would like to burst my bubble with some rule I'm not aware of?
You are correct

MrStash

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Re: VTSAX question
« Reply #17 on: February 05, 2016, 11:52:02 AM »
AGI or MAGI?

Well, the way I read it it's neither, it is taxable income.

IRS website: https://www.irs.gov/publications/p17/ch08.html
Quote
The maximum rate of tax on qualified dividends is:
0% on any amount that otherwise would be taxed at a 10% or 15% rate.
15% on any amount that otherwise would be taxed at rates greater than 15% but less than 39.6%.
20% on any amount that otherwise would be taxed at a 39.6% rate.
Key phrase is "otherwise would be taxed at..." That means after exemptions and deductions and all the gadgets and goodies. Both AGI and MAGI are calculated before exemptions and standard/ itemized deductions. Sorry this is getting into the tax topic.
« Last Edit: February 05, 2016, 11:53:58 AM by MrStash »

BarkyardBQ

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Re: VTSAX question
« Reply #18 on: February 05, 2016, 12:10:08 PM »
Thanks MrStash!

Jeremy E.

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Re: VTSAX question
« Reply #19 on: February 05, 2016, 02:16:39 PM »
AGI or MAGI?

Well, the way I read it it's neither, it is taxable income.

IRS website: https://www.irs.gov/publications/p17/ch08.html
Quote
The maximum rate of tax on qualified dividends is:
0% on any amount that otherwise would be taxed at a 10% or 15% rate.
15% on any amount that otherwise would be taxed at rates greater than 15% but less than 39.6%.
20% on any amount that otherwise would be taxed at a 39.6% rate.
Key phrase is "otherwise would be taxed at..." That means after exemptions and deductions and all the gadgets and goodies. Both AGI and MAGI are calculated before exemptions and standard/ itemized deductions. Sorry this is getting into the tax topic.
If your highest tax bracket is 15% or less, you will have qualified dividends and pay no tax on them, I'm pretty sure your highest tax bracket is determined from your AGI

dandarc

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Re: VTSAX question
« Reply #20 on: February 05, 2016, 02:19:06 PM »
If your highest tax bracket is 15% or less, you will have qualified dividends and pay no tax on them, I'm pretty sure your highest tax bracket is determined from your AGI
You're wrong.  Your marginal tax bracket is determined by taxable income.