Tax Implications if Stop Reinvest Dividends

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abredt
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Tax Implications if Stop Reinvest Dividends

Post by abredt » Tue May 01, 2018 3:40 pm

Retired. Have "enough."
Taking RMDs from Keogh and IRAs. Automatic Reinvesting Dividends in non-retirement index funds.
Index Funds in Vanguard include 2 tax-exempt bond funds + 2 stock funds.

For many years, starting in 1990, I put $500 per month into each of these funds.
Vanguard's cost basis reporting does not go back far enough, so figuring out the cost basis will be a huge chore.
(I do have records from all transactions.)
Tax guy says wait till one of us dies to withdraw from these accounts so I get stepped-up basis.

I'd like to stop reinvesting dividends and have them put into the settlement fund for my immediate use.
Does that affect my cost-basis? Do I somehow have to identify shares?

2018 Federal tax bracket will be 24%
2018 State tax bracket will be 9%

Thanks, cb

bloom2708
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Re: Tax Implications if Stop Reinvest Dividends

Post by bloom2708 » Tue May 01, 2018 3:44 pm

The tax implications of the dividend (in a taxable account) are the same. The taxable event happened upon the dividend. A portion is qualified. A portion may not be qualified.

The dividend goes to your settlement account. You can withdraw to checking or re-invest.

If you re-invest (in taxable) down the road you may have a gain or loss on the new shares purchased with the dividend. No tax event until the shares are sold.
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delamer
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Re: Tax Implications if Stop Reinvest Dividends

Post by delamer » Tue May 01, 2018 3:46 pm

Future dividends that are not reinvested will not change your cost basis.

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celia
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Re: Tax Implications if Stop Reinvest Dividends

Post by celia » Tue May 01, 2018 3:52 pm

I am confused by the original post as it doesn't specify WHICH account (tax-deferred or taxable) each question applies to.

For example, dividends in a tax-deferred account are not taxed (until withdrawn), but in a taxable account, they are taxed the same whether they are re-invested or not. If you re-invest them in taxable, you have lots of tiny purchases. One way to avoid this is to let the dividends accumulate in a money market account, then re-invest that money once or twice a year in whatever you want.

bradpevans
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Re: Tax Implications if Stop Reinvest Dividends

Post by bradpevans » Tue May 01, 2018 4:10 pm

abredt wrote:
Tue May 01, 2018 3:40 pm
Retired. Have "enough."
Taking RMDs from Keogh and IRAs. Automatic Reinvesting Dividends in non-retirement index funds.
Index Funds in Vanguard include 2 tax-exempt bond funds + 2 stock funds.

For many years, starting in 1990, I put $500 per month into each of these funds.
Vanguard's cost basis reporting does not go back far enough, so figuring out the cost basis will be a huge chore.
(I do have records from all transactions.)
Tax guy says wait till one of us dies to withdraw from these accounts so I get stepped-up basis.

I'd like to stop reinvesting dividends and have them put into the settlement fund for my immediate use.
Does that affect my cost-basis? Do I somehow have to identify shares?

2018 Federal tax bracket will be 24%
2018 State tax bracket will be 9%

Thanks, cb
My *guess* is that they would be in tax-deffered, all money that comes out comes out as "ordinary income" and you pay the tax % that is relevant for you that particular year. Here there is no "basis" (for you at least), it's all ordinary income.

Had they been in a typical after-tax brokerage account, you would have been receiving a statement every year indicating the amount of dividends.

GAAP
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Re: Tax Implications if Stop Reinvest Dividends

Post by GAAP » Tue May 01, 2018 4:27 pm

I think you're asking about mutual funds held in a taxable account -- right?

If so, then the income subject to taxes does not change when you choose to reinvest or not reinvest your dividends. You are correct that the record-keeping requirements to prove a cost basis are significantly different. That is one of several reasons that I don't like reinvesting dividends or capital gain distributions from mutual funds in a taxable account.

Cost basis is determined by whatever price you paid at the time -- if you're using FIFO, then you need to be able to calculate that manually. Unless you were lucky enough to have been tracking this from the beginning, this will probably require a fair amount of data entry. Average cost would be a little easier to prove -- but you'll need full records back to 1990 for either one. If you're selling 1 share, and you have dividends that purchased 0.018, 0.205, 0.335, 0.001, 0.127, 0.012, 0.228, 0.345, 0.13, 0.23 shares all at different prices, you will need to figure out how much of those were sold, and therefore what they cost -- plus keep track of how many remain for the next sale.

Sounds like Tax Guy just doesn't want the work -- and would probably charge you for the effort. However, you could do the grunt work yourself. 27 years, with probably around 40-50 transactions per year will take a while -- even if you just want to figure out total cost basis.

A stepped-up basis is certainly easiest -- but may not be appropriate for your situation. It really comes down to how much of that money you need/want now, how much you want to protect the tax-sheltered accounts, how much tax you're willing to pay now.

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Artsdoctor
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Re: Tax Implications if Stop Reinvest Dividends

Post by Artsdoctor » Tue May 01, 2018 6:02 pm

Are you sure Vanguard can't provide you with an average cost basis? I can understand being unable to help with specific lot ID or even FIFO, but I'd be surprised if they can't give you average cost.

Your state tax rate is 9%. Are you a CA resident? If so, you would indeed get the stepped up cost basis of the entire account when one spouse dies. However, that seems like an awfully flippant piece of advice from an accountant.

abredt
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Re: Tax Implications if Stop Reinvest Dividends

Post by abredt » Thu May 03, 2018 5:45 pm

Thanks to all for your advice. I changed the dividends option to transfer the money to the settlement fund.

Re: cost basis
Vanguard gives me 2 totals for each fund = covered and non-covered amounts.
Then they say:
For tax-reporting purposes, the difference between covered and non-covered shares is this: For covered shares, we're required to report cost basis to both you and the IRS. For non-covered shares, the reporting is sent only to you. You are responsible for reporting the sale of non-covered shares.

So, Covered is what they report to the IRS.
Non-covered means I have to calculate for every purchase and reinvested dividends of the fund since 1990.

Then I'd have to decide average or specified shares.
YUK !!
cb

Easy Rhino
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Re: Tax Implications if Stop Reinvest Dividends

Post by Easy Rhino » Thu May 03, 2018 6:00 pm

Vanguard may be able to tell you the cost basis, even if it's non-covered.

For instance, about 20 years ago Charles Schwab was able to go back 10 years and provide me the cost basis for about 30 lots of an individual stock.

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FiveK
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Re: Tax Implications if Stop Reinvest Dividends

Post by FiveK » Thu May 03, 2018 6:32 pm

abredt wrote:
Thu May 03, 2018 5:45 pm
Then they say:
For tax-reporting purposes, the difference between covered and non-covered shares is this: For covered shares, we're required to report cost basis to both you and the IRS. For non-covered shares, the reporting is sent only to you. You are responsible for reporting the sale of non-covered shares.

So, Covered is what they report to the IRS.
Non-covered means I have to calculate for every purchase and reinvested dividends of the fund since 1990.
Not "calculate" - merely "report", as Easy Rhino implied. In other words, you would have to type in the basis Vanguard reports to you (assuming they have it, which from you post it appears they do) when filing a return if you sell any. That's all.

And, unless you have some unusual investments now, any more purchases will be "covered" shares so you will be, so to speak, covered.

abredt
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Re: Tax Implications if Stop Reinvest Dividends

Post by abredt » Fri May 04, 2018 2:09 pm

I don't understand.
I have not put in any money for the past 10 years. I had put in $500 per month for 20 years and reinvested dividends. I am no longer reinvesting dividends.

I assume I would benefit to use FIFO for allocating the shares to sell.
If I sell some of the shares and use FIFO, I would have to go into my records to see how much I paid for those shares and how much was reinvested dividends.

Wouldn't I have to do the same if I used Average cost basis?
Thanks, cb

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FiveK
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Re: Tax Implications if Stop Reinvest Dividends

Post by FiveK » Fri May 04, 2018 2:23 pm

abredt wrote:
Fri May 04, 2018 2:09 pm
I don't understand.
I have not put in any money for the past 10 years. I had put in $500 per month for 20 years and reinvested dividends. I am no longer reinvesting dividends.

I assume I would benefit to use FIFO for allocating the shares to sell.
If I sell some of the shares and use FIFO, I would have to go into my records to see how much I paid for those shares and how much was reinvested dividends.

Wouldn't I have to do the same if I used Average cost basis?
Thanks, cb
Assuming the investment has been increasing regularly in price, LIFO will be more favorable to you because it will minimize the amount of tax paid for a given amount of income.

You have to go into your records only if the brokerage does not have a cost basis for all your share lots.

They may or may not - do you know the actual situation?

Note that the brokerage may have the cost basis even if the shares are "uncovered" and thus the brokerage will not report the basis to the IRS. In that case, the brokerage will report the cost basis to you.

FactualFran
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Re: Tax Implications if Stop Reinvest Dividends

Post by FactualFran » Fri May 04, 2018 2:58 pm

abredt wrote:
Fri May 04, 2018 2:09 pm
I don't understand.
I have not put in any money for the past 10 years. I had put in $500 per month for 20 years and reinvested dividends. I am no longer reinvesting dividends.

I assume I would benefit to use FIFO for allocating the shares to sell.
If I sell some of the shares and use FIFO, I would have to go into my records to see how much I paid for those shares and how much was reinvested dividends.

Wouldn't I have to do the same if I used Average cost basis?
Thanks, cb
With non-covered shares, you would not do the same if you used Average Basis rather than FIFO. With Average Basis you would determine the basis per share only once. With FIFO you would have to determine the cost of the specific shares that were sold. With covered shares, the broker determines the basis.

If you sell some non-covered shares and used Average Basis, then you usually would have to calculate the average basis of the non-covered shares only once. As the Remaining shares of IRS Publication 550 puts it
The average basis of the shares you still hold after a sale of some of your shares is the same as the average basis of the shares sold. The next time you make a sale, your average basis will still be the same, unless you have acquired additional shares (or have made a subsequent adjustment to basis).
Because any acquired additional shares would be covered shares, those additional shares would not change the basis of the non-covered shares. Adjustments to the basis, such as due to a split or a return of capital distribution, are unusual.

abredt
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Re: Tax Implications if Stop Reinvest Dividends

Post by abredt » Fri May 04, 2018 4:58 pm

I will get a copy of Pub 550 and go over it. I think some of it will change for 2018 taxes so I will get it again next year.

I'm don't anticipate selling any shares this year.

Thanks to all for your help.
cb

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