Making taxable account more tax efficient

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hap_ca
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Making taxable account more tax efficient

Post by hap_ca » Sat Jun 16, 2018 1:53 pm

I currently hold in my taxable account:
CA Intermediate Term Muni (VCADX)
Short Term Bond Index (VBIRX)
Total Stock Market Index (VTSAX)
FTSE All World Ex US (VFWAX)
Limited Term Tax Exempt (VMLUX)

Tax bracket: State 9.3%, Federal 24%. 401k, Roth maxed yearly.

I started with the first 4 funds with a 25/25/25/25 allocation (50/50 equity/bond) as sort of a long term house downpayment and tiered emergency fund holding. I admit I didn't have a very good plan and just wanted to keep the money invested in some way. It has worked out over the years but now the balances are growing and it's time to rethink my plan. The amounts in my bond holdings are large enough for the original purpose of a tiered emergency fund and potential house downpayment so I've decided to include the stock holdings as part of my retirement holdings instead.

If I include the stock bond funds in my retirement funds it will tilt my AA towards equity too much so I am planning on rebalancing with new money by selling my short term bond index and exchanging it into stock holdings. I will be selling the equivalent stock holdings in my IRA and buying bond funds.

Taxable:
Short Term Bond Index -$50k
Total Stock Market Index +$25k
FTSE All World Ex US +$25k

IRA:
Total Stock Market Index -$25k
FTSE All World Ex US -$25k
Total Bond Market Index +50k

Net:
Short Term Bond Index -$50k
Total Bond Market Index +50k

After the change I will only consider VMLUX and VCADX as my tiered emergency cash and downpayment funding. For any cash windfalls I'll do similar transactions as the one above and fund VFWAX and VTSAX to put more for retirement. Is that a reasonable plan?

I also currently have an unrealized loss of around $1,800 on my short term bond index. If I sell it can I deduct it against my dividends this year? I'm not planning on selling any stock for gains and I use standard deduction.

ofckrupke
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Re: Making taxable account more tax efficient

Post by ofckrupke » Sat Jun 16, 2018 4:20 pm

hap_ca wrote:
Sat Jun 16, 2018 1:53 pm
I also currently have an unrealized loss of around $1,800 on my short term bond index. If I sell it can I deduct it against my dividends this year? I'm not planning on selling any stock for gains and I use standard deduction.
Better than that (since most of the stock fund dividends will be qualified and taxed at a favored rate): you can carry the loss against wage, interest, and nonqualified dividend income. In the days of pen(cil) and paper this would be done, after computation on schedule D, by entering the net loss as a negative number (capped at -$3000 annually, excess to be carried forward to the following tax year; this all happens on schedule D) on line 13 of form 1040.

In terms of placing the money freed in taxable by selling the short bond index, I'll just note that it's been many years since VFWAX was as tax efficient as VTSAX for those in the 9.3% CA bracket. By my reckoning the difference for 2017 for a $25k lot was about $38. Of course, if one does not have a fat loss carryover from the past, it may be wiser to accept the small extra tax drag from dividends in return for greater potential in tax loss harvesting that comes with greater diversity in the fresh tax lots.

Also you may want to read through some of the thinking on tax-adjusted allocation (that is, your risk per dollar in a stock fund in a Roth IRA ain't the same as in a taxable account). Not that you will find a consensus, but even a decision not to adjust should probably be a considered one.

Welcome to the forum, by the way (I see your debut topic was greeted by crickets...).

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badbreath
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Re: Making taxable account more tax efficient

Post by badbreath » Sat Jun 16, 2018 6:20 pm

Ya you should not have bond in your taxable. take time to read this

https://www.bogleheads.org/wiki/Tax-eff ... _placement

It has helped me
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

hap_ca
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Joined: Sat Jun 09, 2018 3:42 pm

Re: Making taxable account more tax efficient

Post by hap_ca » Sat Jun 16, 2018 6:37 pm

ofckrupke wrote:
Sat Jun 16, 2018 4:20 pm
hap_ca wrote:
Sat Jun 16, 2018 1:53 pm
I also currently have an unrealized loss of around $1,800 on my short term bond index. If I sell it can I deduct it against my dividends this year? I'm not planning on selling any stock for gains and I use standard deduction.
Better than that (since most of the stock fund dividends will be qualified and taxed at a favored rate): you can carry the loss against wage, interest, and nonqualified dividend income. In the days of pen(cil) and paper this would be done, after computation on schedule D, by entering the net loss as a negative number (capped at -$3000 annually, excess to be carried forward to the following tax year; this all happens on schedule D) on line 13 of form 1040.
Thanks, good to know. It should be a decent decision tax wise then.

In terms of placing the money freed in taxable by selling the short bond index, I'll just note that it's been many years since VFWAX was as tax efficient as VTSAX for those in the 9.3% CA bracket. By my reckoning the difference for 2017 for a $25k lot was about $38. Of course, if one does not have a fat loss carryover from the past, it may be wiser to accept the small extra tax drag from dividends in return for greater potential in tax loss harvesting that comes with greater diversity in the fresh tax lots.
Well I already hold a good amount of VFWAX in my taxable so I’ll just be adding to it. I don’t mind losing a bit of tax efficiency since I think it gives more flexibility over just holding VTSAX. It’s a big improvement over the taxable bond fund.
Also you may want to read through some of the thinking on tax-adjusted allocation (that is, your risk per dollar in a stock fund in a Roth IRA ain't the same as in a taxable account). Not that you will find a consensus, but even a decision not to adjust should probably be a considered one.

Welcome to the forum, by the way (I see your debut topic was greeted by crickets...).
Yeah the first post had to be approved and by the time it was it kind of fell off the forums. I did end up converting to specific I’d and bit the bullet on figuring out all my transactions. It took awhile but it wasn’t as bad as I though.

ofckrupke
Posts: 539
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Re: Making taxable account more tax efficient

Post by ofckrupke » Sat Jun 16, 2018 7:23 pm

If I don't, then someone else will point out that if your taxable account is at least twice the size of your necessary EF, you could hold that in the form of stock funds as well; then if you need to draw on the EF, exchange an equal or equal(tax-adjusted) amount of bonds for stocks in a tax advantaged account. It would be overdoing it to treat as absolutely inviolable the part of taxable that you are notionally reserving for retirement.

But if you're bent on maintaining the EF in fixed income form in taxable: Vanguard Short-Term Treasury Index (VSBSX admiral shares, $10k min) has a lower duration than VMLUX and, unless you are subject to the 3.8% NIIT, its expected return (as represented by the SEC yield anyway) is slightly higher than VMLUX after taxation in your 24%|9.3% brackets. And of course its credit quality is higher than VMLUX. I might even be willing to pay a very small tax cost to make that switch, but I suspect that you'd actually be harvesting a small loss.

hap_ca
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Re: Making taxable account more tax efficient

Post by hap_ca » Sun Jun 17, 2018 1:24 am

ofckrupke wrote:
Sat Jun 16, 2018 7:23 pm
If I don't, then someone else will point out that if your taxable account is at least twice the size of your necessary EF, you could hold that in the form of stock funds as well; then if you need to draw on the EF, exchange an equal or equal(tax-adjusted) amount of bonds for stocks in a tax advantaged account. It would be overdoing it to treat as absolutely inviolable the part of taxable that you are notionally reserving for retirement.
Yeah honestly it's a work in progress. My plan is to reduce the number of bond holdings in my taxable account over time once I figure out a good plan. I am starting to understand what people mean when they say all money is fungible once balances get reasonably large. Even if you don't have a dedicated ER fund you can do the transition you mentioned without a huge impact overall. For example if you have $1,000,000 evenly split between taxable and tax advantaged and you need an ER fund of $100,000 you can easily get access to the funds without losing too much even during bad economic times especially if you use spec id and minimize capital gains.
But if you're bent on maintaining the EF in fixed income form in taxable: Vanguard Short-Term Treasury Index (VSBSX admiral shares, $10k min) has a lower duration than VMLUX and, unless you are subject to the 3.8% NIIT, its expected return (as represented by the SEC yield anyway) is slightly higher than VMLUX after taxation in your 24%|9.3% brackets. And of course its credit quality is higher than VMLUX. I might even be willing to pay a very small tax cost to make that switch, but I suspect that you'd actually be harvesting a small loss.
I bought into VMLUX because it was under the tax exempt category for Vanguard and it has no federal taxes due and is partially tax exempt for state based on the percentage of CA bonds it holds. What taxes are due for VSBSX? Is it exempt from state taxes but I have to pay federal?

Actually the Short Term Bond Index Fund holds more than 60% as government obligations. I've just been filing my taxes with it as total ordinary dividends and not making any special changes on my state filings. I guess I've been paying more taxes than I need to all this time?? Oh no.

ofckrupke
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Re: Making taxable account more tax efficient

Post by ofckrupke » Sun Jun 17, 2018 2:59 pm

hap_ca wrote:
Sun Jun 17, 2018 1:24 am
I bought into VMLUX because it was under the tax exempt category for Vanguard and it has no federal taxes due and is partially tax exempt for state based on the percentage of CA bonds it holds. What taxes are due for VSBSX? Is it exempt from state taxes but I have to pay federal?
Exactly.
hap_ca wrote:
Sun Jun 17, 2018 1:24 am
Actually the Short Term Bond Index Fund holds more than 60% as government obligations. I've just been filing my taxes with it as total ordinary dividends and not making any special changes on my state filings. I guess I've been paying more taxes than I need to all this time?? Oh no.
My claim about VSBSX vs. VMLUX under 24%/93.% taxation relied on the former's CA-exempt percentages for 2017 from Vanguard (50.23% of the interest income from 60.76% exempt US gov't assets) and today's SEC yields and durations. I believe that short end muni spreads have narrowed even as the treasury yield curve has flattened, so the clear preferability today of VSBSX in your brackets is a recent/temporal thing.

You can still claim refunds for tax years 2014-2017 with FTB by amending past returns (deadline for 2014 is 4-year-anniversary of original due date in April 2019).

hap_ca
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Re: Making taxable account more tax efficient

Post by hap_ca » Sun Jun 17, 2018 4:30 pm

ofckrupke wrote:
Sun Jun 17, 2018 2:59 pm
hap_ca wrote:
Sun Jun 17, 2018 1:24 am
I bought into VMLUX because it was under the tax exempt category for Vanguard and it has no federal taxes due and is partially tax exempt for state based on the percentage of CA bonds it holds. What taxes are due for VSBSX? Is it exempt from state taxes but I have to pay federal?
Exactly.
hap_ca wrote:
Sun Jun 17, 2018 1:24 am
Actually the Short Term Bond Index Fund holds more than 60% as government obligations. I've just been filing my taxes with it as total ordinary dividends and not making any special changes on my state filings. I guess I've been paying more taxes than I need to all this time?? Oh no.
My claim about VSBSX vs. VMLUX under 24%/93.% taxation relied on the former's CA-exempt percentages for 2017 from Vanguard (50.23% of the interest income from 60.76% exempt US gov't assets) and today's SEC yields and durations. I believe that short end muni spreads have narrowed even as the treasury yield curve has flattened, so the clear preferability today of VSBSX in your brackets is a recent/temporal thing.

You can still claim refunds for tax years 2014-2017 with FTB by amending past returns (deadline for 2014 is 4-year-anniversary of original due date in April 2019).
Just wanted to say thank you very much for your advice in this thread! I will probably not bother filing an amendment as it's not very much money but I've learned something new and will file my future taxes correctly.

ofckrupke
Posts: 539
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Re: Making taxable account more tax efficient

Post by ofckrupke » Sun Jun 17, 2018 5:08 pm

hap_ca wrote:
Sun Jun 17, 2018 4:30 pm
ofckrupke wrote:
Sun Jun 17, 2018 2:59 pm
My claim about VSBSX vs. VMLUX under 24%/93.% taxation relied on the former's CA-exempt percentages for 2017 from Vanguard (50.23% of the interest income from 60.76% exempt US gov't assets) and today's SEC yields and durations. I believe that short end muni spreads have narrowed even as the treasury yield curve has flattened, so the clear preferability today of VSBSX in your brackets is a recent/temporal thing.

You can still claim refunds for tax years 2014-2017 with FTB by amending past returns (deadline for 2014 is 4-year-anniversary of original due date in April 2019).
Just wanted to say thank you very much for your advice in this thread! I will probably not bother filing an amendment as it's not very much money but I've learned something new and will file my future taxes correctly.
Actually I'm baffled at what I wrote above (the underlined part). What I should have written was that the claim relied on 24%/0% taxation for VSBSX and 0%/9.3% for VMLUX. I had consulted the Vanguard doc on income/holding breakdown and found the 50.23/60.76% numbers, but the fund these apply to is the VBIRX fund that you have marked for disposition (I was curious about the tax burden in my brackets). No claims here about VBIRX vs. VMLUX or VSBSX because of its mixed holdings...only that yes, generally losses should be harvested.

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Artsdoctor
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Re: Making taxable account more tax efficient

Post by Artsdoctor » Sun Jun 17, 2018 6:30 pm

hap_ca wrote:
Sun Jun 17, 2018 1:24 am
ofckrupke wrote:
Sat Jun 16, 2018 7:23 pm
If I don't, then someone else will point out that if your taxable account is at least twice the size of your necessary EF, you could hold that in the form of stock funds as well; then if you need to draw on the EF, exchange an equal or equal(tax-adjusted) amount of bonds for stocks in a tax advantaged account. It would be overdoing it to treat as absolutely inviolable the part of taxable that you are notionally reserving for retirement.
Yeah honestly it's a work in progress. My plan is to reduce the number of bond holdings in my taxable account over time once I figure out a good plan. I am starting to understand what people mean when they say all money is fungible once balances get reasonably large. Even if you don't have a dedicated ER fund you can do the transition you mentioned without a huge impact overall. For example if you have $1,000,000 evenly split between taxable and tax advantaged and you need an ER fund of $100,000 you can easily get access to the funds without losing too much even during bad economic times especially if you use spec id and minimize capital gains.
But if you're bent on maintaining the EF in fixed income form in taxable: Vanguard Short-Term Treasury Index (VSBSX admiral shares, $10k min) has a lower duration than VMLUX and, unless you are subject to the 3.8% NIIT, its expected return (as represented by the SEC yield anyway) is slightly higher than VMLUX after taxation in your 24%|9.3% brackets. And of course its credit quality is higher than VMLUX. I might even be willing to pay a very small tax cost to make that switch, but I suspect that you'd actually be harvesting a small loss.
I bought into VMLUX because it was under the tax exempt category for Vanguard and it has no federal taxes due and is partially tax exempt for state based on the percentage of CA bonds it holds. What taxes are due for VSBSX? Is it exempt from state taxes but I have to pay federal?

Actually the Short Term Bond Index Fund holds more than 60% as government obligations. I've just been filing my taxes with it as total ordinary dividends and not making any special changes on my state filings. I guess I've been paying more taxes than I need to all this time?? Oh no.
Hap:

The prospectus for Limited-Term shows that only 9% of the funds' holdings are issued by California. In order to be exempt from CA income tax, the fund would have to hold more than half of its holdings issued by CA. You'll have to pay state income tax on all of the dividends generated from VMLUX.

hap_ca
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Re: Making taxable account more tax efficient

Post by hap_ca » Sun Jun 17, 2018 8:49 pm

Artsdoctor wrote:
Sun Jun 17, 2018 6:30 pm
hap_ca wrote:
Sun Jun 17, 2018 1:24 am
ofckrupke wrote:
Sat Jun 16, 2018 7:23 pm
If I don't, then someone else will point out that if your taxable account is at least twice the size of your necessary EF, you could hold that in the form of stock funds as well; then if you need to draw on the EF, exchange an equal or equal(tax-adjusted) amount of bonds for stocks in a tax advantaged account. It would be overdoing it to treat as absolutely inviolable the part of taxable that you are notionally reserving for retirement.
Yeah honestly it's a work in progress. My plan is to reduce the number of bond holdings in my taxable account over time once I figure out a good plan. I am starting to understand what people mean when they say all money is fungible once balances get reasonably large. Even if you don't have a dedicated ER fund you can do the transition you mentioned without a huge impact overall. For example if you have $1,000,000 evenly split between taxable and tax advantaged and you need an ER fund of $100,000 you can easily get access to the funds without losing too much even during bad economic times especially if you use spec id and minimize capital gains.
But if you're bent on maintaining the EF in fixed income form in taxable: Vanguard Short-Term Treasury Index (VSBSX admiral shares, $10k min) has a lower duration than VMLUX and, unless you are subject to the 3.8% NIIT, its expected return (as represented by the SEC yield anyway) is slightly higher than VMLUX after taxation in your 24%|9.3% brackets. And of course its credit quality is higher than VMLUX. I might even be willing to pay a very small tax cost to make that switch, but I suspect that you'd actually be harvesting a small loss.
I bought into VMLUX because it was under the tax exempt category for Vanguard and it has no federal taxes due and is partially tax exempt for state based on the percentage of CA bonds it holds. What taxes are due for VSBSX? Is it exempt from state taxes but I have to pay federal?

Actually the Short Term Bond Index Fund holds more than 60% as government obligations. I've just been filing my taxes with it as total ordinary dividends and not making any special changes on my state filings. I guess I've been paying more taxes than I need to all this time?? Oh no.
Hap:

The prospectus for Limited-Term shows that only 9% of the funds' holdings are issued by California. In order to be exempt from CA income tax, the fund would have to hold more than half of its holdings issued by CA. You'll have to pay state income tax on all of the dividends generated from VMLUX.
This is what the 540 instructions have to say:
Line 8 – Taxable Interest
If you did not receive any of the kinds of income listed below, make no entry
on this line in either column B or column C.
Enter in column B the interest you received from:

U.S. savings bonds (except for interest from series EE U.S. savings
bonds issued after 1989 that qualified for the Education Savings Bond
Program exclusion).

U.S. Treasury bills, notes, and bonds.

Any other bonds or obligations of the United States and its
territories.

Interest from Ottoman Turkish Empire Settlement Payments.

Interest income from children under age 19 or students under age 24
included on the child’s federal tax return and reported on the California tax
return by the parent. For more information, get form FTB 3803, Parents’
Election to Report Child’s Interest and Dividends
Certain mutual funds pay “exempt-interest dividends.” If the mutual fund
has at least 50% of its assets invested in tax-exempt U.S. obligations and/or
in California or its municipal obligations, that amount of dividend is exempt
from California tax. The proportion of dividends that are tax-exempt will be
shown on your annual statement or statement issued with Form 1099-DIV,
Dividends and Distributions.
Enter in column C the interest you identified as tax-exempt interest on your
federal Form 1040 (or Form 1040A), line 8b,
and
which you received from:

The federally exempt interest dividends from other states, or their
municipal obligations and/or from mutual funds that do not meet the 50%
rule above.

Non-California state bonds.

Non-California municipal bonds issued by a county, city, town, or other
local government unit.

Obligations of the District of Columbia issued after December 27, 1973.

Non-California bonds if the interest was passed through to you from
S corporations, trusts, partnerships, or Limited Liability Companies
(LLCs).

Interest or other earnings earned from a Health Savings Account (HSA) are
not treated as taxed deferred. Interest or earnings in a HSA are taxable in
the year earned.

Interest on any bond or other obligation issued by the Government of
American Samoa.

Interest income from children under age 19 or students under age 24
included on the parent’s federal tax return and reported on the California
tax return by the child.
Make no entries in either column B or column C for interest you earned on
Federal National Mortgage Association (Fannie Mae) Bonds, Government
National Mortgage Association (Ginnie Mae) Bonds, and Federal Home
Loan Mortgage Corporations (FHLMC) securities, or grants paid to low
income individuals.
Get FTB Pub. 1001 if you received interest income from the items listed
above passed through to you from S corporations, trusts, estates,
partnerships, or LLC
I believe this is the part that applies:
The federally exempt interest dividends from other states, or their
municipal obligations and/or from mutual funds that do not meet the 50%
rule above.
VMLUX only holds municipal bonds and you will have to pay CA taxes on interest from municipal bonds from states other than CA. The 9% of CA bonds that the funds hold should not be subject to CA state income tax.

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Artsdoctor
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Re: Making taxable account more tax efficient

Post by Artsdoctor » Sun Jun 17, 2018 9:51 pm

^ If a fund has more than 50% federal debt, you can deduct a portion from your state return (for example, Vanguard Federal Money Market return). You'd still pay federal income tax on it.

In order to deduct a tax-exempt fund's dividends from your state income tax, the fund will have to have more than 50% CA bonds to do so. You can't do that with Limited-Term (or Short-Term, or Intermediate-Term, or Long-Term, for that matter).

hap_ca
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Re: Making taxable account more tax efficient

Post by hap_ca » Sun Jun 17, 2018 10:08 pm

Artsdoctor wrote:
Sun Jun 17, 2018 9:51 pm
^ If a fund has more than 50% federal debt, you can deduct a portion from your state return (for example, Vanguard Federal Money Market return). You'd still pay federal income tax on it.

In order to deduct a tax-exempt fund's dividends from your state income tax, the fund will have to have more than 50% CA bonds to do so. You can't do that with Limited-Term (or Short-Term, or Intermediate-Term, or Long-Term, for that matter).
Limited term tax exempt holds 100% municipal bonds which is different from federal debt. My tax software asked me what % of exempt interest dividends come from California municipal bonds for this holding and calculated it for me. Maybe there’s a bug in the tax software, I don’t know.

The rule you’re referring to has you put the amount in column B. The one I’m referring to puts it in column C.

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Artsdoctor
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Re: Making taxable account more tax efficient

Post by Artsdoctor » Sun Jun 17, 2018 10:22 pm

^ I'm not sure what software you're using, but I think you may be misinterpreting this.

Unless a municipal bond fund contains at least 50% CA bonds, the state will not allow you to deduct any of the interest. All of the interest from Vanguard's tax-exempt bond funds (that are not CA-specific) will be taxable by the state. Or, more specifically for VMLUX, you cannot claim that 9% of the dividends from the fund are exempt from state tax; you will have to pay state income tax on all of those dividends.

If you want dividends that are exempt from CA income tax (and federal income tax), you'll need to choose from the CA money market fund, the CA intermediate-term fund, or the CA long-term bond fund. Additionally, any federal tax fund which contains more than 50% federal bonds will allow you to claim at least some exemption from your state income tax, but you'll have to pay federal tax on all of the dividends from those funds.

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Artsdoctor
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Re: Making taxable account more tax efficient

Post by Artsdoctor » Sun Jun 17, 2018 10:42 pm

Hap, one last thing.

You might want to figure tax-equivalent yields. Your federal marginal tax rate is low enough that you might not need a municipal bond fund, or at least the limited-term term fund.

The short-term bond index (VBIRX) has an SEC yield of 2.78% and has an average maturity of only 2.9 years. More than 60% of the fund is made up of government bonds but I don't know how many of those would be exempt from state tax. It's possible you might get a very small break on your state tax return with this fund.

The limited-term tax-exempt bond fund has an SEC yield of only 2.02% which would give you a tax-equivalent yield of 2.66%. It also has an average maturity of 3.6 years.

I don't see where the appeal would be for you to have VMLUX. The average maturity is longer and the yield is less for you.

jalbert
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Re: Making taxable account more tax efficient

Post by jalbert » Sun Jun 17, 2018 10:55 pm

I recommend IXUS for a total non-US stock index fund in a taxable account. It is more tax efficient than Vanguard options.
Risk is not a guarantor of return.

ofckrupke
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Re: Making taxable account more tax efficient

Post by ofckrupke » Sun Jun 17, 2018 11:44 pm

Artsdoctor wrote:
Sun Jun 17, 2018 10:22 pm
If you want dividends that are exempt from CA income tax (and federal income tax), you'll need to choose from the CA money market fund, the CA intermediate-term fund, or the CA long-term bond fund. Additionally, any federal tax fund which contains more than 50% federal bonds will allow you to claim at least some exemption from your state income tax, but you'll have to pay federal tax on all of the dividends from those funds.
To extend this: FTB does not have separate holding thresholds for CA munis and for Treasuries (and other state-exempt US obligations), but simply one for CA exempt holdings. A mutual fund could meet the threshold by holding 30% CA munis and 30% US Treasuries, whereupon the dividend income derived from this 60% would be CA exempt. The Treasury interest would get subtracted via form 540CA line 8(a) column B, and the CA muni interest component of this fund's dividends would appear on 540CA line 8(b).
100% of the dividends from VMLUX should show up both in 540CA line 8(b) AND as an addition via 540CA line 8(a) column C, if the person or software completing the return is doing it right.

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