In taxable account sell Total Bond buy Tax Exempt

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vest74
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In taxable account sell Total Bond buy Tax Exempt

Post by vest74 »

Holding VTBLX in taxable account at a negative cost basis. Wonder if I should sell half and buy Intermediate Term Tax Exempt VWITX, would save a bit on taxes (due to CGain Loss)and for the future tax free dividends - i wonder if the tax efficiency of the VWITX for the long term would overcome it's inferior performance compared to VTBLX? I should not need to sell for a few yrs if ever. Retired 66. Why the 3 fund portfolio does not have any tax exempt bonds :? ?
I am in the 15% bracket.
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by Compound »

My understanding was that holding tax exempt bonds only make sense in the highest tax brackets. In the 15% bracket, I think you'll lag in performance on an after tax basis.
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by livesoft »

vest74 wrote:Why the 3 fund portfolio does not have any tax exempt bonds :? ?
I think the reason is that the expectation is that folks will hold bonds in their tax-deferred accounts and those folks that are in high tax brackets that don't have tax-deferred acccounts know about other bond options.
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grabiner
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by grabiner »

Even though your marginal tax rate might be 27.75% once you start taking Social Security, munis won't help; muni income is counted as income for making Social Security taxable, so it is taxed at 12.75%.

You might want to hold a stock fund in your taxable account; the tax on stock dividends and capital gains is zero if you are in the 15% bracket. (It will go up to 12.75%, as above, from the Social Security phase-in, but the tax on anything else will go up to 27.75%.)
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vest74
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by vest74 »

So maybe whittle down any bonds and reit funds in the taxable accounts, replace with like VTSAX and in the IRA's buy the same amount VTBLX to get the total allocation back where i want 40% Eq 60% Bonds and the heck with muni's. Yes the SS is getting taxed plenty - like over 70% last year :annoyed
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by Misenplace »

Be careful that you don't create a wash sale event by selling bonds in your taxable account and then buying them in your tax deferred account. Then you would not be able to use that capital loss.

Edit: I mean buying and selling substantially similar bond funds.
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vest74
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by vest74 »

Thanks, i believe that selling tax exempt in one account and buying taxable in another account is ok? Someone please correct me if i am wrong.
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by Longdog »

grabiner wrote:Even though your marginal tax rate might be 27.75% once you start taking Social Security, munis won't help; muni income is counted as income for making Social Security taxable, so it is taxed at 12.75%.
Do you mean that as a result of the muni income causing 85% of your SS to be taxable, it is equivalent to taxing the muni income at 12.75%, and not zero?
You might want to hold a stock fund in your taxable account; the tax on stock dividends and capital gains is zero if you are in the 15% bracket. (It will go up to 12.75%, as above, from the Social Security phase-in, but the tax on anything else will go up to 27.75%.)
What are you referring to when you say, "...the tax on anything else"?
All else being equal, why would it be better to have qualified dividends than muni interest? If they are equal, don't they both have the same impact on taxabilty of SS benefits?
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by Longdog »

vest74 wrote:Thanks, i believe that selling tax exempt in one account and buying taxable in another account is ok? Someone please correct me if i am wrong.
I would think so - they aren't substantially equivalent.
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vest74
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by vest74 »

I believe Qualified Dividends are NOT included in figuring SS taxable income
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by AlwaysaQ »

Qualified Dividends and Capital Gains are definitely included as income when determining how much Social Security is taxable. Qualified Dividends are a subset of Ordinary Dividends.
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by grabiner »

Longdog wrote:
grabiner wrote:Even though your marginal tax rate might be 27.75% once you start taking Social Security, munis won't help; muni income is counted as income for making Social Security taxable, so it is taxed at 12.75%.
Do you mean that as a result of the muni income causing 85% of your SS to be taxable, it is equivalent to taxing the muni income at 12.75%, and not zero?
Yes, this is correct. If you are in the phase-in, you pay 27.75% tax on ordinary income, 12.75% on munis, and 12.75% on qualified dividends.
You might want to hold a stock fund in your taxable account; the tax on stock dividends and capital gains is zero if you are in the 15% bracket. (It will go up to 12.75%, as above, from the Social Security phase-in, but the tax on anything else will go up to 27.75%.)
What are you referring to when you say, "...the tax on anything else"?
The 27.75% rate on ordinary income.
All else being equal, why would it be better to have qualified dividends than muni interest? If they are equal, don't they both have the same impact on taxabilty of SS benefits?
Given your tax rates, it is better to have stocks in taxable and taxable bonds in tax-deferred, rather than the other way around. And if you do hold bonds in taxable, it is better to hold taxable bonds than munis.

This is specific to your tax rate; other investors should hold munis in taxable because of high federal and state tax rates.
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by Misenplace »

vest74 wrote:Thanks, i believe that selling tax exempt in one account and buying taxable in another account is ok? Someone please correct me if i am wrong.
In your original post, you mentioned selling VTBLX in your taxable account because it had a slight loss. If you sell that in your taxable account and then buy VTBLX in your tax deferred account within 30 days, that will be a wash sale and your capital loss will be disallowed. They are substantially the same regardless of which account you hold them.

You could sell the VTBLX and buy municipal bonds in your taxable account, wait 31 days, then sell the municipal bonds, buy equities with the proceeds, and at that time buy VTBLX in your tax deferred account. Municipal bonds are not substantially the same as VTBLX.

Alternatively, you could sell VTBLX in your taxable account, and put the proceeds in a high interest savings account for 31 days. After 31 days, take that money out of the savings account and buy equities in your taxable account. At the same time, exchange equities into VTBLX in your tax deferred account in order to keep your equities/bond at your desired ratio. I would probably do this latter option. Just my preference.
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vest74
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by vest74 »

Alwaysaq wrote;
"Qualified Dividends and Capital Gains are definitely included as income when determining how much Social Security is taxable. Qualified Dividends are a subset of Ordinary Dividends"

Look at Schedule D line 20, and SS worksheet line 2 (modified income) at least for me of modest income(plenty of assets)
cap gains and qualified div's are taxed at 0 for fed, but on the SS worksheet cap gains are only included in amount of SS taxable and qualified div's are NOT.
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by convert949 »

grabiner wrote:
Longdog wrote:
grabiner wrote:Even though your marginal tax rate might be 27.75% once you start taking Social Security, munis won't help; muni income is counted as income for making Social Security taxable, so it is taxed at 12.75%.
Do you mean that as a result of the muni income causing 85% of your SS to be taxable, it is equivalent to taxing the muni income at 12.75%, and not zero?
Yes, this is correct. If you are in the phase-in, you pay 27.75% tax on ordinary income, 12.75% on munis, and 12.75% on qualified dividends.
You might want to hold a stock fund in your taxable account; the tax on stock dividends and capital gains is zero if you are in the 15% bracket. (It will go up to 12.75%, as above, from the Social Security phase-in, but the tax on anything else will go up to 27.75%.)
What are you referring to when you say, "...the tax on anything else"?
The 27.75% rate on ordinary income.
All else being equal, why would it be better to have qualified dividends than muni interest? If they are equal, don't they both have the same impact on taxabilty of SS benefits?
Given your tax rates, it is better to have stocks in taxable and taxable bonds in tax-deferred, rather than the other way around. And if you do hold bonds in taxable, it is better to hold taxable bonds than munis.

This is specific to your tax rate; other investors should hold munis in taxable because of high federal and state tax rates.
OK I am officially confused...

Let's say that due to pension and SS income my tax rate is 25% and my SS is being taxed at 85%, the max. I decide to add the Vanguard Intermediate Term tax exempt fund today as at 25% marginal tax rates, the SEC income is favorable when compared to Total Bond Market fund. In this scenario is there still an imputed tax of 12.75% on the muni income?
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by AlwaysaQ »

Vest74
Look at Schedule D line 20, and SS worksheet line 2 (modified income) at least for me of modest income(plenty of assets)
cap gains and qualified div's are taxed at 0 for fed, but on the SS worksheet cap gains are only included in amount of SS taxable and qualified div's are NOT.
Ordinary dividends include qualified dividends. Ordinary dividends are added to income that is added to half of social security.
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by House Blend »

convert949 wrote:
grabiner wrote:
Longdog wrote:
grabiner wrote:Even though your marginal tax rate might be 27.75% once you start taking Social Security, munis won't help; muni income is counted as income for making Social Security taxable, so it is taxed at 12.75%.
Do you mean that as a result of the muni income causing 85% of your SS to be taxable, it is equivalent to taxing the muni income at 12.75%, and not zero?
Yes, this is correct. If you are in the phase-in, you pay 27.75% tax on ordinary income, 12.75% on munis, and 12.75% on qualified dividends.
You might want to hold a stock fund in your taxable account; the tax on stock dividends and capital gains is zero if you are in the 15% bracket. (It will go up to 12.75%, as above, from the Social Security phase-in, but the tax on anything else will go up to 27.75%.)
What are you referring to when you say, "...the tax on anything else"?
The 27.75% rate on ordinary income.
All else being equal, why would it be better to have qualified dividends than muni interest? If they are equal, don't they both have the same impact on taxabilty of SS benefits?
Given your tax rates, it is better to have stocks in taxable and taxable bonds in tax-deferred, rather than the other way around. And if you do hold bonds in taxable, it is better to hold taxable bonds than munis.

This is specific to your tax rate; other investors should hold munis in taxable because of high federal and state tax rates.
OK I am officially confused...

Let's say that due to pension and SS income my tax rate is 25% and my SS is being taxed at 85%, the max. I decide to add the Vanguard Intermediate Term tax exempt fund today as at 25% marginal tax rates, the SEC income is favorable when compared to Total Bond Market fund. In this scenario is there still an imputed tax of 12.75% on the muni income?
Once your "other" (non SS) income is high enough, then 100% of your SS income is 85% taxable, and these exotic marginal rates such as 12.75% on tax exempt interest disappear.

This wiki page may be helpful.
https://www.bogleheads.org/wiki/Taxatio ... y_benefits

Also, for someone in the 25% bracket whose other income is not yet high enough, the imputed marginal rate on tax exempt interest would be 21.25% (i.e., 85% of 25%).
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by harmony »

Here's a link to an article with illuminating graphs prepared by a CPA which explains the effect of dividends in the 15% bracket:
http://www.laytoncpa.com/~laytoncp/imag ... %20Tax.pdf
This might help the OP and the poster above who is “officially confused”, and anyone else reading this who is similarly confused.

Another angle:
One never knows how many years of retirement we will be without our spouse. If due to loss of his spouse the OP suddenly were to go from the 15% tax bracket to the 25% tax bracket, would the advice to him be any different considering the tax cost of switching to muni bond funds when already in the 25% bracket? If the OP were to start munis now, the tax cost could possibly be lower, right?
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by livesoft »

AlwaysaQ wrote:Vest74
Look at Schedule D line 20, and SS worksheet line 2 (modified income) at least for me of modest income(plenty of assets)
cap gains and qualified div's are taxed at 0 for fed, but on the SS worksheet cap gains are only included in amount of SS taxable and qualified div's are NOT.
Ordinary dividends include qualified dividends. Ordinary dividends are added to income that is added to half of social security.
That's right.
There are ordinary non-qualified dividends and ordinary qualified dividends. Both types are ordinary dividends. On a 1099-DIV there is no separate box for ordinary non-qualified dividends because the IRS and others assume folks can do the subtraction themselves.

Then there are exempt-interest dividends. I would not be surprised if there are some other kinds of dividends, too.
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by whodidntante »

At a 15% bracket, consider TLH to a different taxable bond fund by buying an ETF or another company's mutual fund. If you prefer staying with Vanguard mutual funds, you may be able to create similar exposure by using component funds. Corporate, Treasury, and whatever else TBM holds. A small allocation to preferred stock may also be worth a look due to the favorable tax treatment (0% potentially).
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vest74
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by vest74 »

Thanks all. Then why does one care if dividends are qualified or not?
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by livesoft »

vest74 wrote:Thanks all. Then why does one care if dividends are qualified or not?
I care because qualified dividends are tax-free to me, but non-qualified dividends are taxed at 15% to me. I would rather spend 15% on myself than give it to the IRS.
Last edited by livesoft on Thu Dec 29, 2016 6:18 pm, edited 1 time in total.
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by grabiner »

convert949 wrote:Let's say that due to pension and SS income my tax rate is 25% and my SS is being taxed at 85%, the max. I decide to add the Vanguard Intermediate Term tax exempt fund today as at 25% marginal tax rates, the SEC income is favorable when compared to Total Bond Market fund. In this scenario is there still an imputed tax of 12.75% on the muni income?
In this situation, your muni income would be taxed at 0%, and your regular income would be taxed at 25%, because you are beyond the phase-in.

The way the phase-in works is that every $1 of income above a limit makes 85 cents of SS taxable (50 cents in a small lower range), until the maximum 85% is taxed. If you are in the phase-in and in the 15% bracket, and you have $100 of muni income (or qualified dividends, not taxed in the 15% bracket), you have $85 more of taxable SS. The tax on $85 is $12.75, which is why you have a 12.75% marginal tax rate on muni income.

Similarly, if you are in the phase-in and in the 25% bracket, your marginal tax rate on muni income is 21.25%. (But it is 46.25% on ordinary income, so munis may still make sense.)
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vest74
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by vest74 »

What is the "phase in" being referred to? we have taxable modest pension and div's etc. to get to AGI of 65,000. I plan on getting taxable accounts to index stock funds(sell as needed for $- not afraid of book work) and try to put bonds in retirement account. Can't do a DARN thing with Ed Jones American Funds non-tax deferred/overtaxed$%%^#%$^#$^%&^ - seem to be good stock traders at my tax expense
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by hudson »

grabiner wrote:
convert949 wrote:Let's say that due to pension and SS income my tax rate is 25% and my SS is being taxed at 85%, the max. I decide to add the Vanguard Intermediate Term tax exempt fund today as at 25% marginal tax rates, the SEC income is favorable when compared to Total Bond Market fund. In this scenario is there still an imputed tax of 12.75% on the muni income?
In this situation, your muni income would be taxed at 0%, and your regular income would be taxed at 25%, because you are beyond the phase-in.

The way the phase-in works is that every $1 of income above a limit makes 85 cents of SS taxable (50 cents in a small lower range), until the maximum 85% is taxed. If you are in the phase-in and in the 15% bracket, and you have $100 of muni income (or qualified dividends, not taxed in the 15% bracket), you have $85 more of taxable SS. The tax on $85 is $12.75, which is why you have a 12.75% marginal tax rate on muni income.

Similarly, if you are in the phase-in and in the 25% bracket, your marginal tax rate on muni income is 21.25%. (But it is 46.25% on ordinary income, so munis may still make sense.)
THANKS! Where can I read more about this?
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by convert949 »

grabiner wrote:
convert949 wrote:Let's say that due to pension and SS income my tax rate is 25% and my SS is being taxed at 85%, the max. I decide to add the Vanguard Intermediate Term tax exempt fund today as at 25% marginal tax rates, the SEC income is favorable when compared to Total Bond Market fund. In this scenario is there still an imputed tax of 12.75% on the muni income?
In this situation, your muni income would be taxed at 0%, and your regular income would be taxed at 25%, because you are beyond the phase-in.

The way the phase-in works is that every $1 of income above a limit makes 85 cents of SS taxable (50 cents in a small lower range), until the maximum 85% is taxed. If you are in the phase-in and in the 15% bracket, and you have $100 of muni income (or qualified dividends, not taxed in the 15% bracket), you have $85 more of taxable SS. The tax on $85 is $12.75, which is why you have a 12.75% marginal tax rate on muni income.

Similarly, if you are in the phase-in and in the 25% bracket, your marginal tax rate on muni income is 21.25%. (But it is 46.25% on ordinary income, so munis may still make sense.)
Thank you for the explanation... Makes more sense to me now!

Best to all,

Bob
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Re: In taxable account sell Total Bond buy Tax Exempt

Post by abuss368 »

vest74 wrote:Holding VTBLX in taxable account at a negative cost basis. Wonder if I should sell half and buy Intermediate Term Tax Exempt VWITX, would save a bit on taxes (due to CGain Loss)and for the future tax free dividends - i wonder if the tax efficiency of the VWITX for the long term would overcome it's inferior performance compared to VTBLX? I should not need to sell for a few yrs if ever. Retired 66. Why the 3 fund portfolio does not have any tax exempt bonds :? ?
I am in the 15% bracket.
the Three Fund can have tax exempt bonds in a taxable account! Simply invest in Total Stock, Total International Stock, and Intermediate Tax Exempt Fund in a taxable account. That is what we do and it works!
John C. Bogle: “Simplicity is the master key to financial success."
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