Dividends Taxed Differently ?

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larryinnewyork
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Dividends Taxed Differently ?

Post by larryinnewyork » Fri Mar 14, 2014 4:16 pm

Good afternoon all,

I have been a long time viewer, and really like the good advise offered here.
Thank you everyone as I have learned alot just viewing.
But now I have a question.
I don't think it's difficult to answer, I just haven't been able to figure this out.


I have been investing for 25+ years and never thought of this before.

Facts:
I own Vanguards Wellington Fund in a Taxable Account.
I would like to receive the quarterly dividends for living expenses.
Fund Value: $237,000.
Cost Basis: +$55,000. $1,000 short term / $54,000 long term
(previously, all Dividends have been reinvested).


Question:
Would it be more tax efficient to:
A) 'auto' transfer the dividends to my Money Market Account at the time the Dividends are issued ? ? ?
OR
B) Wait until the Dividends are issued and move the money myself ? ? ?

Confusion:
If I choose B), would 'Cost Basis' have to be considered ? ? ?
I know I will pay taxes on the dividends, I always have.
But would the Cost Basis create more taxes ? ? ?

Any help would be greatly appreciated.
I thank you in advance.

Larry
Last edited by larryinnewyork on Fri Mar 14, 2014 4:49 pm, edited 1 time in total.

technovelist
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Re: Dividends Taxed Differently ?

Post by technovelist » Fri Mar 14, 2014 4:47 pm

The taxes would be the same either way, given that they are from a taxable account.
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jebmke
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Re: Dividends Taxed Differently ?

Post by jebmke » Fri Mar 14, 2014 4:53 pm

Are you currently having the dividends reinvested in new shares?
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pjstack
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Re: Dividends Taxed Differently ?

Post by pjstack » Fri Mar 14, 2014 4:57 pm

technovelist wrote:The taxes would be the same either way, given that they are from a taxable account.
Well, I don't know about that. If he moved (sold shares) equal to the dividend(s), the money would be a long term capital gain (assuming, as he said) the funds have been invested for 25 years.
pjstack

Topic Author
larryinnewyork
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Re: Dividends Taxed Differently ?

Post by larryinnewyork » Fri Mar 14, 2014 4:58 pm

Previously and currently, Dividends & Capitol Gains have all been reinvested.

I am just confused because if I go with Choice B), I know I would have to consider the Cost Basis.

As with Choice A) I would only pay taxes on the dividend (I understand that).

Topic Author
larryinnewyork
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Re: Dividends Taxed Differently ?

Post by larryinnewyork » Fri Mar 14, 2014 5:01 pm

pjstack,

It looks like you understand my confusion.

If I 'sell' an equal dollar amount 'after' the dividend is payed out, I think I would have to pay more in taxes.

I have been investing for 30 years thru Vanguard and never incountered this question before.

sscritic
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Re: Dividends Taxed Differently ?

Post by sscritic » Fri Mar 14, 2014 5:03 pm

What does until mean?

A) Dividends go to MM on 3/26 automatically.
B) Dividends go to MM on 3/27 after selling using specific identification - cost basis. In this case, your previous basis is irrelevant. You may have short-term gains or losses, depending on what happens during the day. Thus your taxes would be larger or smaller depending on if you have a one day gain or loss.

livesoft
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Re: Dividends Taxed Differently ?

Post by livesoft » Fri Mar 14, 2014 5:06 pm

You will have to report the quarterly dividends on your tax return in any event, so have them sent to your checking account to spend.

If you reinvest them, then move them, I can see a couple of possibilities that are both suboptimal:
A. You create 2 transactions in your account: a buy, then a sell. You would have to keep track of that or at least hope that your financial institution (Vanguard?) keeps track of it. You would also have to specifically identify that these were the shares you wanted to sell which I think would be too much for you since you are asking the questions you are asking.

B. You don't specifically identify the shares you want to sell, so the default is First-In, First-Out or your oldest shares. If you sell your oldest shares, you will very likely have to pay a capital gains taxes on those shares, too. So you would end up creating more taxes for yourself that you could easily avoid.

OK, I realize there are even more possibilities but in the interest of less confusion, I won't mention any but the two above.
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Topic Author
larryinnewyork
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Re: Dividends Taxed Differently ?

Post by larryinnewyork » Fri Mar 14, 2014 5:23 pm

Ok - I'm getting some ideas here.

Note: In the past, when selling any Shares, I have used the "Average" Cost Basis.
I choose this method for simplicity reasons.
I will continue to use this method as I don't want to change mid-stream.

If I were to specifically choose what Shares to Sell, I see it as being NO additional taxes.

Now, it looks to me if I 'Sell' an equal amount 'after' the dividend is paid,
I will have to pay more in taxes because I am going with the 'average' cost basis.

If this is the case (I now believe it is), I will benefit by having Vanguard transfer this money
at the time the Dividend is issued.

Topic Author
larryinnewyork
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Re: Dividends Taxed Differently ?

Post by larryinnewyork » Fri Mar 14, 2014 5:50 pm

If there are no further replies, I believe I have my answer.
Thank you all.

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Re: Dividends Taxed Differently ?

Post by livesoft » Fri Mar 14, 2014 5:52 pm

I think many of us believe in "just in time learning". Your decision is the one I would make for myself in your shoes.
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Re: Dividends Taxed Differently ?

Post by Dale_G » Fri Mar 14, 2014 6:12 pm

larryinnewyork wrote:If there are no further replies, I believe I have my answer.
Thank you all.
May not. Let's make sure you understand.

1. You will pay taxes on the dividend whether you "reinvest" in the fund or direct the dividends to your money market account (or have Vanguard send the dividend to your bank - or to you via a paper check.

2. If you reinvest the dividend (on which you will pay taxes) and then sell shares equal to the dividend amount, you will pay an additional capital gains taxes on on the sale - accounting for your tax basis. This solution makes no sense at all unless you want to pay more taxes than necessary.

Are you sure about your cost basis? All of those previously reinvested dividends are added to your cost basis.

Dale
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ras4250
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Re: Dividends Taxed Differently ?

Post by ras4250 » Fri Mar 14, 2014 6:16 pm

If the dividends are qualified you have a capital gain that is taxed at the lower rate.

You reinvest the dividends automatically.

Now if you are able to (don't know because you said you've done average cost basis in the past) but if it's possible to sell specific lots and those lots are currently at a loss since you bought them (and you've held the lots for 1 year and 1 day), then wouldn't that create an offsetting loss to match up against your gain? Therefore owing no tax?

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Re: Dividends Taxed Differently ?

Post by theduke » Fri Mar 14, 2014 7:07 pm

Dale_G wrote:
larryinnewyork wrote:If there are no further replies, I believe I have my answer.
Thank you all.
May not. Let's make sure you understand.

1. You will pay taxes on the dividend whether you "reinvest" in the fund or direct the dividends to your money market account (or have Vanguard send the dividend to your bank - or to you via a paper check.

2. If you reinvest the dividend (on which you will pay taxes) and then sell shares equal to the dividend amount, you will pay an additional capital gains taxes on on the sale - accounting for your tax basis. This solution makes no sense at all unless you want to pay more taxes than necessary.

Are you sure about your cost basis? All of those previously reinvested dividends are added to your cost basis.

Dale
I agree with Dale.

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Re: Dividends Taxed Differently ?

Post by sscritic » Fri Mar 14, 2014 8:30 pm

I don't.

A) I got a dividend of $10. I bought shares with $10. I sold those exact same shares for $9. I have a loss of $1 to deduct from my taxes.
B) I got a dividend of $10. I bought shares with $10. I sold those exact same shares for $11. I have a gain of $1 to pay taxes on.

Some of you appear to believe that A is impossible and share prices only go up. I don't agree.

P.S. I know what specific ID - cost basis is.

P.P.S. Now if someone insists on using average basis when it is against their own best interests, I can't stop them.

P.P.P.S. I don't know why people are opposed to share prices going up, even if they believe that is the only thing that can happen. In B, I got $10 of dividends, but $11 to spend. How is that a bad thing?

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Re: Dividends Taxed Differently ?

Post by sscritic » Fri Mar 14, 2014 8:53 pm

Ok, so the question was about selling an equal dollar amount. I am not sure why you would do that. When I use specific ID - cost basis, I sell specific shares (thus the name specific ID). I don't sell $10 worth of shares, I sell 0.464 shares, the ones I bought on a particular date or dates.

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Re: Dividends Taxed Differently ?

Post by freddie » Fri Mar 14, 2014 10:31 pm

The money would still be a long term capital gain.For example if the fund is trading at 10 dollars and you get 100 dollar div, you can either buy 10 shares or transfer the money. Either way your paying long term capital gains. Disposing of the shares is another transaction where you can have either short term loss or gain. The reinvested divs make tax loss harvesting complicated (google wash rules) so if I wanted the money, I would stop reinvesting dividends and capital gains distributions.

pjstack wrote:
technovelist wrote:The taxes would be the same either way, given that they are from a taxable account.
Well, I don't know about that. If he moved (sold shares) equal to the dividend(s), the money would be a long term capital gain (assuming, as he said) the funds have been invested for 25 years.

Topic Author
larryinnewyork
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Re: Dividends Taxed Differently ?

Post by larryinnewyork » Sat Mar 15, 2014 8:08 am

2. If you reinvest the dividend (on which you will pay taxes) and then sell shares equal to the dividend amount, you will pay an additional capital gains taxes on on the sale - accounting for your tax basis. This solution makes no sense at all unless you want to pay more taxes than necessary.

I also agree with Dale.
This was my assumption in my original post.

I was never in this situation before and just wanted confirmation.
Thank you all.

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Re: Dividends Taxed Differently ?

Post by sscritic » Sat Mar 15, 2014 9:07 am

I agree that you are better off taking the dividends, but I don't agree with some of the reason's given.

At the end of this month, you are going to get a random amount of money as dividends. Let's call that X.

If you take cash, you end up with X. If you reinvest, you will have shares worth X on that day. If you sell those shares the next day, you will have X + Y, where Y is the change, positive or negative, in the value of the shares you bought for X. Y is most likely less than 1% of X. Since Y can be positive or negative, you might have a gain or a loss to report on your taxes.

One way, you have X to spend, the other you have X + Y to spend.

Now if you define the problem as "I want Y to be zero, because I really need to have exactly X to spend," then you don't really have a choice. The part I don't understand is why you need exactly X, a random number, and not X + Y, another random number that is very close to X.

To me, the difference between the two is that one requires more reporting on your tax return since you have to report your sale, which would be four lines on Form 8949, one for each quarterly dividend. The reason for taking the dividends is that on average you won't gain anything by taking the shares and selling, but you do complicate your taxes. The reason is not because you will have a gain that has to be taxed, as you might have a loss since Y can be positive or negative.

Note that I didn't sell a dollar amount. When you use specific ID, you can't sell dollar amounts, you can only sell specific numbers of shares. With specific ID, the shares sold will be the brand new shares, and the gains and losses will be short-term. If you want to sell dollar amounts, you have to use average basis, which, in your situation, will generate gains. So the reason that Dale and others say that you will have gains is that they are assuming that you have to use average basis, but you only have to use average basis if you insist that X is exactly the amount of money that you need to spend and that X + Y is just completely wrong.

So yes, take the dividends because of the more complicated tax return, not because you will always have gains if you take shares and sell. You have roughly an equal chance of having a loss on your sale. Again, this assumes you are not fixated on having exactly X to spend.

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Re: Dividends Taxed Differently ?

Post by HueyLD » Sat Mar 15, 2014 9:33 am

..............
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Re: Dividends Taxed Differently ?

Post by abuss368 » Sat Mar 15, 2014 9:48 am

I would simply deposit the dividends in your checking account. You will avoid having to sell shares and incurring possible capital gains.

The dividends are reported each year on Form 1099-DIV and thus entered on IRS Form Schedule B.
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Re: Dividends Taxed Differently ?

Post by ras4250 » Sat Mar 15, 2014 3:54 pm

I have a continuing question on this topic.

Say I am in 15% long term capital gains bracket.

If I receive $10,000 in qualified dividends during the year, then I will pay 15% tax on the $10,000 = $1,500.

However, what if I also have an $8,000 long term capital loss the same year. Can I net the loss against the qualified dividends? So now my tax is 15% of $2,000 = $300?

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Re: Dividends Taxed Differently ?

Post by sscritic » Sat Mar 15, 2014 4:13 pm

You really have to fill out some forms by hand if you want to learn.

1) where do you put your dividends?

2) where do your long term losses go?

3) Where do they meet up? Is it on the same form or on different forms?

4) How is your tax computed, and where?

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Cosmo
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Re: Dividends Taxed Differently ?

Post by Cosmo » Sat Mar 15, 2014 4:15 pm

larryinnewyork wrote:Previously and currently, Dividends & Capitol Gains have all been reinvested.

I am just confused because if I go with Choice B), I know I would have to consider the Cost Basis.

As with Choice A) I would only pay taxes on the dividend (I understand that).
I think you answered your own question. Pick A because you avoid capital gains -in this case capital gains using the average cost basis. So yeah, easy answer. A.

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Re: Dividends Taxed Differently ?

Post by sscritic » Sat Mar 15, 2014 4:19 pm

Cosmo wrote: Pick A because you avoid capital gains -in this case capital gains using the average cost basis.
Only if he chooses average basis for the shares he has not yet purchased with the dividends he has not yet received. The fact that he used average basis in the past does not prevent him from using specific ID - cost basis in the future. I would pick A as well, but not because I am not capable of telling Vanguard I want to use specific ID. It's only a click or two away.

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