Taxable account how does it work ?

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robwny
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Taxable account how does it work ?

Post by robwny » Sun Aug 28, 2011 12:40 pm

Hi I have used all of my tax-deferred space and have started a taxable account and I have read books and I have total international Stock-market in there. My question is how I pay tax on this. At the end of the year I will know how much I made and then I will pay tax on that ? Then I have to keep track each year what I made correct? My tax bracket is 25% is this the rate I would pay

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greenspam
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Post by greenspam » Sun Aug 28, 2011 12:54 pm

as always, | peace, | greenie.

livesoft
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Post by livesoft » Sun Aug 28, 2011 1:01 pm

As long as you do not sell anything in your taxable account, it works pretty much like a savings account. Have you ever had a savings account? If so, how did you pay the taxes on the interest you earned by your savings account?
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mas
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Re: Taxable account how does it work ?

Post by mas » Sun Aug 28, 2011 1:30 pm

robwny wrote:At the end of the year I will know how much I made and then I will pay tax on that ?
Your broker will send you a 1099-DIV and/or a 1099-INT, which records how much dividends (and capital gains distributions) and interest that you received for the year.
robwny wrote:Then I have to keep track each year what I made correct?
If you make any sales of stocks/bonds/funds, then you may also owe capital gains tax for those sales. You need to keep track of how much you paid for those, and your broker will send you a 1099-B that records how much you received. If there is a gain, then you owe tax on it (unless you also have losses which can offset the gain).

If you do not sell anything, then the gains are not taxed (unrealized), and you do not have to do anything.
robwny wrote:My tax bracket is 25% is this the rate I would pay
Interest, and some dividends are taxed as normal income (at 25%), other dividends and capital gains are taxed at a different rate (15% for now, but the tax laws are changing).

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greenspam
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Post by greenspam » Sun Aug 28, 2011 2:07 pm

livesoft wrote:As long as you do not sell anything in your taxable account, it works pretty much like a savings account. Have you ever had a savings account? If so, how did you pay the taxes on the interest you earned by your savings account?

and mas wrote: If you do not sell anything, then the gains are not taxed (unrealized), and you do not have to do anything.




no, because the fund itself can incur capital gains/losses, which are passed onto the investor, even if the investor does not sell the fund:

from vanguard website:

https://personal.vanguard.com/us/conten ... sesJSP.jsp


"A fund's realized and unrealized capital gains and losses can provide helpful information about the tax implications of holding a particular fund in a taxable account. (These tax implications do not apply to investors holding a fund in a tax-favored account such as an IRA or an employer-sponsored retirement plan.)

A realized capital gain/loss is an increase (or decrease) in the value of a security that is "real" because the security has been sold by the portfolio manager. The capital gains/losses are "realized" by the fund, and any distributions to the shareholder as a result of realized gains (adjusted for any realized losses) are taxable during the tax year in which the security was sold. Realized losses can be used to offset realized gains in an attempt to reduce taxable gains. If realized losses are higher than realized gains, a fund can "carry forward" these excess losses to offset future gains.

An unrealized capital gain/loss (also called a "paper profit or loss") is an increase (or decrease) in the value of a security that isn't "real" because the security hasn't been sold. When a portfolio manager sells a security, however, the capital gains/losses become "realized" by the fund, and any realized gains (net of any losses) are taxable during the tax year in which the security was sold. Funds with low turnover rates, such as index funds, tend to have more unrealized gains than actively managed funds and are less likely to pass taxable gains on to investors.

A fund's unrealized appreciation or depreciation figures are valuable because they can give an idea of whether a fund would need to distribute any gains if all of its securities were sold. Such information may help you determine your potential exposure to taxable distributions."
Last edited by greenspam on Sun Aug 28, 2011 2:16 pm, edited 1 time in total.
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livesoft
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Post by livesoft » Sun Aug 28, 2011 2:11 pm

When someone asks a question like this, I believe the answer should come in stages of understanding.
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mas
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Post by mas » Sun Aug 28, 2011 7:37 pm

greenspam wrote:no, because the fund itself can incur capital gains/losses, which are passed onto the investor, even if the investor does not sell the fund
And that is covered by the 1099-DIV

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Epsilon Delta
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Re: Taxable account how does it work ?

Post by Epsilon Delta » Mon Aug 29, 2011 11:57 am

robwny wrote:My question is how I pay tax on this. At the end of the year I will know how much I made and then I will pay tax on that ? Then I have to keep track each year what I made correct?
I find some of the replies to be vaguely disturbing.

You have a duty to keep accurate records of your financial transactions. At the end of the year you use your records to fill out a tax return. The tax return tells you what taxes you owe.

It is true that at the end of the year financial counter-parties should send you information returns such as W-2s and 1099s but your taxes are based on what actually happened (which is reflected in your accurate records); not on what the 1099s say. Hopefully the information returns will be correct but how will you know if you don't keep your own records? It is not unheard of for 1099s to be wrong or missing. In any case there are taxable "events" such as wash sales that do not an can not show up on an information return.

"Ideally" you keep a journal, making an entry for each taxable event, including the date, the amount and what it is. Taxable events include paychecks; receiving dividends and interest; making deductible payments (such as property taxes); contributions, withdrawals or recharecterisations for IRAs; and capital transactions such as purchases or sales of taxable investments. In lieu of a journal you can just keep a copy of the transaction record for each event, making sure you put them were you can find all of them at the end of the year.

If you live a simple life at the end of the year you will have a list of several dozen to few hundred taxable events that you can feed into your tax return. If you are a day trader you may have tens of thousands of event. In which case you probably need a more complex system for bookkeeping.

For a sale of an asset you need to match the purchase. The purchase may have occurred in a prior year. In theory you can look through prior years journals to find the purchase, but most people prefer to keep additional records indexed by asset to make it easier.

robwny
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Post by robwny » Mon Aug 29, 2011 1:55 pm

im using it for retirement and will be adding money, so i when i get my 1099s i will pay tax on that. im just using total international stock right now.

pshonore
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Re: Taxable account how does it work ?

Post by pshonore » Tue Aug 30, 2011 8:53 am

Epsilon Delta wrote:It is true that at the end of the year financial counter-parties should send you information returns such as W-2s and 1099s but your taxes are based on what actually happened (which is reflected in your accurate records); not on what the 1099s say. Hopefully the information returns will be correct but how will you know if you don't keep your own records? It is not unheard of for 1099s to be wrong or missing. In any case there are taxable "events" such as wash sales that do not an can not show up on an information return.
One of the surest ways to get an IRS letter is to have your return not match 1099s supplied by your financial custodians. (1099 INT, 1099 DIV and 1099 B forms). Agree its a good idea to keep your own records but if there's a discrepency you should really try to get a corrected 1099 and if that fails, attach an explanation to your tax return explaining the difference.

robwny
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Post by robwny » Tue Aug 30, 2011 9:34 am

This is why im thinking of buying a vanguard annuity and I bonds to keep it simple ?

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Ice-9
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Post by Ice-9 » Tue Aug 30, 2011 10:02 am

I wouldn't worry about an annuity for a relatively efficient fund like Total International Index. I believe respected Boglehead author William Bernstein only recommends variable annuities if you want REIT and can only fit it in taxable.

For just having Total International Index in taxable, the 1099s are simple enough to use and the one or two distributions a year are easy enough to check against what actually was deposited in your bank account / money market fund.

Also, since this is the international fund we're talking about, you'll get to add the foreign tax credit since you have it in taxable.

http://www.bogleheads.org/wiki/Foreign_tax_credit

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