Vanguard Tax-Managed Balanced Fund tax distributions

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The Vanguard Tax-Managed Balanced Fund is specifically designed for placement in taxable accounts. The fund offers a portfolio balanced between a 45% - 50% allocation to stocks benchmarked to the Russell 1000 Index and a 50% - 55%% allocation to municipal bonds benchmarked to the Barclays 7 Year Municipal Bond Index. The 50% or greater allocation to municipal bonds is required for the fund to pass through municipal bond interest as tax-exempt income. The fund samples the Russell 1000 index with a bias towards lower dividend stocks. The table below summarizes the fund's relation to a number of tax factors.


Table. Summary
Fund Distributions.jpg Favorable tax factors Fund Distributions.jpg Unfavorable tax factors

Historical gains distributions : None
Dividends: Bond dividends are federally tax exempt
Qualified dividends: Stock dividends are 100% qualified dividends

ETF shares : No
Dividends: Up to 20% of bond holdings may be subject to Alternative Minimum Tax
Dividends: Bond dividends may be subject to state and local tax

Distributions

The fund has not distributed a capital gain since fund inception in 1994. The fund has harvested net realized losses in a plurality of years in its history and has possessed an accumulated loss carryforward since inception (see the second tab in the footnoted below.) The fund has distributed 100% tax-preferenced qualified stock dividends since the establishment of the preference by law in 2004. The fund's municipal bond dividends have been federally tax exempt since inception. The fund is allowed by prospectus to invest up to 20% of the bond portfolio in private activity bonds, which are subject to the Alternative Minimum Tax (AMT); the fund's tax-exempt dividends are also subject to state and local taxation. [1]

Table. Vanguard Tax-Managed Balanced Fund Tax Distributions
Year Dividends Tax-Exempt Dividends [2]
Taxable Dividends Capital Gains Qualifying Dividends FY Total Return
2013 2.21% 1.40% 0.81% 0.00% 100.00% 14.34%
2012 2.43% 1.51% 0.92% 0.00% 100.00% 10.87%
2011 2.55% 1.79% 0.76% 0.00% 100.00% 5.58%
2010 2.58% 1.81% 0.77% 0.00% 100.00% 10.81%
2009 2.86% 1.97% 0.89% 0.00% 100.00% 18.25%
2008 3.01% 2.17% 0.84% 0.00% 100.00% -18.52%
2007 2.86% 2.10% 0.76% 0.00% 100.00% 5.56%
2006 2.84% 2.09% 0.75% 0.00% 100.00% 9.63%
2005 2.64% 2.00% 0.64% 0.00% 100.00% 4.07%
2004 2.70% 1.96% 0.74% 0.00% 100.00% 7.29%
2003 2.58% 1.99% 0.59% 0.00% n/a 17.30%
2002 2.69% 2.20% 0.49% 0.00% n/a -6.25%
2001 2.64% 2.29% 0.35% 0.00% n/a -3.48%
2000 2.61% 2.26% 0.35% 0.00% n/a 0.61%
1999 2.52% 2.12% 0.40% 0.00% n/a 10.16%
1998 2.63% 2.16% 0.47% 0.00% n/a 16.98%
1997 2.77% 2.41% 0.36% 0.00% n/a 19.89%
1996 3.04% 2.50% 0.54% 0.00% n/a 13.21%
1995 3.06% 2.63% 0.43% 0.00% n/a 24.52%
1994 2.88% 2.51% 0.37% 0.00% n/a -1.40%

Note:

  • For current tax attributes and distributions see Vanguard

Tax rates

Mutual fund distributions will be taxed according to the tax laws governing the investment over the holding period of the investment, which are subject to change. The actual tax imposed will depend upon each individual's tax rate and the timing of purchases and sales. The federal tax rates applicable to mutual fund distributions and investor sales of securities for the period 2013 onward are outlined below. Keep in mind that investment income may also be subject to state and local taxation.

  1. Short-term capital gains distributions are made from realized gains on securities held for one year or less. Short-term gains are taxed at ordinary income tax rates up to 39.6%. Mutual fund short-term gain distributions are included in a fund's ordinary dividend distribution; therefore, capital losses may not be subtracted from these distributions when computing taxes.
  2. Long-term capital gains distributions are made from realized gains on securities held for more than one year. Long-term gains are taxed at 0% for taxpayers in the 10% and 15% tax brackets, at 15% for taxpayers in the 25%, 28%, 33%, and 35% tax brackets, and at 20% in the 39,6% tax bracket. They are reported on tax Schedule D along with any other capital gains, and can be reduced by capital losses.
  3. Qualified dividends are the ordinary dividends [3] that are subject to the same tax rate that applies to long-term capital gains. They should be shown in box 1b of the Form 1099-DIV you receive.
  4. When you sell at a loss you will either offset capital gains which would have otherwise been taxed at your capital gains rate or you will offset income (up to $3,000 maximum per year) which would have otherwise been taxed at your marginal income tax rate, or both. If you offset capital gains that would have otherwise not been taxed at all (because your capital gains tax rate is 0%) then this part of the tax loss harvest may be an outright loss.
  5. The Affordable Care Act imposes a Medicare surcharge of 3.8% on all net investment income (NII) once the taxpayer's adjusted gross income exceeds $200,000 (single) or $250,000 (married); while this tax is not part of the income tax, it has the same effect on investors as a higher tax rate. The NII tax begins to apply to individuals falling in the 33% tax bracket. Thus the top effective marginal tax rate is 23.8% on qualified dividends and long-term gains, 43.4% on ordinary investment income. The tax does not apply to tax-exempt municipal bond dividends.
Federal Income Tax Rates in 2013
Taxable income up to this level Tax rate
Single Married filing joint Head of Household Ordinary income Long-term gains and qualified dividends
$8,925 $17,850 $12,750 10% 0%
$36,250 $72,500 $48,600 15% 0%
$87,850 $146,400 $125,450 25% 15%
$183,250 $223,050 $203,150 28% 15%
$398,350 $398,350 $398,350 33% 15%
$400,000 $450,000 $425,000 35% 15%
above above above 39.6% 20%

In addition, there is a 3.8% Medicare tax rate on investment income in excess of an adjusted gross income of $200,000 ($250,000 for married filing jointly), and 0.9% on salary and self-employment income in excess of this level.


Federal Income Tax Rates in 2012
Taxable income up to this level Tax rate
Single Married filing joint Head of Household Ordinary income Long-term gains and qualified dividends
$8,700 $17,400 $12,400 10% 0%
$35,350 $70,700 $47,350 15% 0%
$85,650 $142,700 $122,300 25% 15%
$178,650 $217,450 $198,050 28% 15%
$388,350 $388,350 $388,350 33% 15%
above above above 35% 15%

In addition, there is a 3.8% Medicare tax rate on investment income in excess of an adjusted gross income of $200,000 ($250,000 for married filing jointly), and 0.9% on salary and self-employment income in excess of this level.


Tax analysis

The following table examines the tax consequences of holding the Vanguard Tax-Managed Balanced Fund in a taxable account. The fund's dividends are federally tax exempt and the fund's stock dividends are 100% qualified dividends. The fund has never distributed a taxable gain. The tables include a 5% state tax rate (which of course may vary according to state, so the blue highlighted marginal state tax field allows for the input of tax rates). [4] Two potential tax factors are not included in the computations:

  1. A portion of the fund's dividends may come from a shareholder's state of residence. If so, this portion of the fund's dividend may be exempt from state tax.
  2. A portion of the fund's dividends may be subject to the alternative minimum tax, should the shareholder be subject to this tax.

The table examines tax costs under the (2010 - 2012) tax regime, using the fund's average tax exempt dividend, average qualified dividend, and average capital gain. The table also provides for the current tax regime, with qualified dividends and capital gains taxed at 0%, 15%, and 20%, depending on marginal tax bracket, along with the ACA Net Investment Income tax assessed on qualified dividends and capital gains at higher tax brackets. The table does not include the tax cost should one sell an investment in the fund and realize a gain. [5]


Table.

(view Google Spreadsheet in browser or download as xls, ods, or pdf)

See also

References

  1. According to data from the Tax Foundation, state individual marginal tax rates range from 0% to 12%.
  2. Table.

    data source: SEC annual reports 2003 forward ; 1994-2003

    (view Google Spreadsheet in browser or download as xls, ods, or pdf)

  3. Fairmark says:

    A portion of your ordinary dividend may be nonqualified because it can include items like these:

    • Taxable interest. When a mutual fund receives taxable interest, the income gets paid out as a dividend. It's a dividend when it goes out of the mutual fund, but it wasn't a dividend when it came into the mutual fund, so it can't be a qualified dividend.
    • Nonqualified dividends. Your mutual fund may receive dividends that are nonqualified. For example, the mutual fund may sell shares just 35 days after buying them, but after receiving a dividend. The mutual fund has to hold the shares at least 61 days to have a qualified dividend. Any amount the mutual fund receives as a nonqualified dividend gets paid to you as a nonqualified dividend.
    • Short-term capital gain. When a mutual fund has a short-term capital gain, it pays this amount to the mutual fund shareholders as an ordinary dividend.
    • Holding mutual fund shares less than 61 days. You should also be aware that any dividend you receive on mutual fund shares held less than 61 days is a nonqualified dividend, even if the mutual fund reports that amount to you as a qualified dividend. You don't have to buy the shares 61 days before the dividend is paid, but the total amount of time you hold the shares (including time before and after the dividend) has to be at least 61 days.
  4. Almost all of the dividends distributed by Equity REITS come in the form of non-qualified dividends. Non-qualified dividends are taxed at marginal income tax rates.

  5. According to data from the Tax Foundation, state individual marginal tax rates range from 0% to 12%.
  6. This table indicates the additional cost for the capital-gains tax when you sell, assuming that you pay taxes on the distribution and reinvest the after-tax portion of the distribution; since it is a one-time cost, the effect is annualized. For example, if you hold an investment for 30 years and lose 10% to taxes when you sell, that is equivalent to losing 0.35% every year. Thus, if you sell the fund, your cost will be the sum of the Table 6 and Table 8 costs. However, you would not pay the Table 8 cost on any stock which you either leave to your heirs or donate to charity, and thus may not pay that cost on your full investment. In particular, you might estimate your total tax cost by using the low-return line in Table 8; if stock returns are high, you will have a large taxable account and will reduce the tax cost by taking longer to deplete it or by not spending it all during your lifetime. Taxes are computed at a tax rate of 15% on long-term gains (except in the "rate rises to 20% column", which applies if that tax reduction is allowed to expire), and on qualified dividends (except in the "no QDI" column, which applies if the tax reduction on qualified dividends expires and the rate is 35%). Although not tabulated, keep in mind that investors in the lower tax brackets (15% or lower) pay lower federal tax rates on investment income for the period 2003 - 2012, and reap higher after-tax returns, outside of tax-exempt municipal bonds, in all asset classes.
    Table. Additional hypothetical tax costs (after taxable funds are sold)
    Fund Pre-tax Returns Distributions Tax Cost Annualized cost over 10 years Annualized cost over 20 years Annualized cost over 30 years 30-year cost if CG tax rate rises to 20%
    Any bond any all any 0.00% 0.00% 0.00% 0.00%
    Tax-efficient stock, low returns 5.00% 2.00% 0.30% 0.36% 0.30% 0.25% 0.33%
    Tax-efficient stock, medium returns 8.00% 2.00% 0.30% 0.63% 0.47% 0.37% 0.50%
    Tax-efficient stock, high returns 11.00% 2.00% 0.30% 0.84% 0.58% 0.43% 0.58%
    Tax-inefficient stock, low returns 5.00% 4.00% 1.00% 0.12% 0.10% 0.09% 0.12%
    Tax-inefficient stock, medium returns 8.00% 4.00% 1.00% 0.43% 0.33% 0.26% 0.35%
    Tax-inefficient stock, high returns 11.00% 4.00% 1.00% 0.66% 0.47% 0.35% 0.47%

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