Avoid taking Dividends?

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chabil
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Avoid taking Dividends?

Post by chabil » Mon Jun 19, 2017 12:15 pm

Livesoft:
A consequence is that the mutual fund shareholder received the information too late to make an informed decision about avoiding the dividend. The ETF shareholder can sell the ETF shares and buy the mutual fund shares on Monday 6/13 and avoid the dividend.

...
Bonus comment: Folks who tax-loss harvested VTSAX and exchanged into VFIAX can avoid the dividends of both these funds by exchanging back from VFIAX into VTSAX early next week. I'm not sure why one would want to do that though with the nice gains that they should have after the TLHing.
This is so totally new to me. We have always reinvested all dividends either into the same or another fund in both taxable and tax-deferred accounts. I do TLH in taxable accounts. I have never heard of AVOIDING dividends, and I presume in taxable account. Obviously I have a lot to learn. I can see this will reduce taxes on the income but I cannot still get my head around not taking the dividends.

Can someone please explain this and how it works or point to any links that I can read. Thank you so much.

Goal33
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Re: Avoid taking Dividends?

Post by Goal33 » Mon Jun 19, 2017 12:18 pm

He avoids dividends by selling shares at a gain/loss before the dividend because he can trade freely either due to being in a 0% cap gains bracket, or due to previous TLHing that has been carried over.
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livesoft
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Re: Avoid taking Dividends?

Post by livesoft » Mon Jun 19, 2017 12:29 pm

Suppose you only invested in BerkshireHathaway which is a conglomerate stock that pays no dividends. This means that you do not get income reported on Schedule B the bottom half and you do not have income on Form 1040 Lines 9a and 9b. It means that your AGI does not include those items.

Why might this be important? If your other income is such that any extra income causes you to lose out on tax credits or bumps you into a higher tax bracket or affects your ACA credit or whatever, then this might be important to you. Or if you want to convert more of a traditional IRA to a Roth IRA while staying in a lower tax bracket, then you would want less AGI.

Of course, you can say, "Wow, I avoid dividends, so I have less income to spend. I'm screwed."

Not necessarily. This is where previous tax-loss harvesting comes into play. Suppose you have $200,000 of carryover losses. That means you can sell assets for a loss or a gain and not increase your AGI as long as the net gain is less than $200,000. That's because the $200,000 of carryover losses will offset the gain.

In reality then instead of $5000 in dividends, one can have $5000 (or other amount) in capital gains that will be offset by carryover losses leaving some for future years.

So suppose I sell XYX the day before it goes ex-dividend and buy ZZX the day (or after) it goes ex-dividend. I have avoided getting the dividends from both XYX and ZZX. Further suppose that XYX had a gain that was offset by losses or maybe it even had loss. Further suppose that XYX and ZZX are a fine pair of tax-loss harvesting partners which means they are in the same asset class.

That's it. Very few people will want to do this and have all the conditions in place to do this.
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chabil
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Re: Avoid taking Dividends?

Post by chabil » Mon Jun 19, 2017 12:37 pm

Thank you, Livesoft. We are in the exact tax situation you describe. I need to look into this and understand the whole link of TLH to avoiding dividend strategy. And then explain to my husband so he doesn't go into shock when I tell him we are going to avoid taking dividends, and that is a GOOD thing.

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Re: Avoid taking Dividends?

Post by mortfree » Mon Jun 19, 2017 12:43 pm

Is this a strategy (avoiding dividends) for the average person or is this one of those whole other level investor kind of thing?

Also, I can't imagine having 200k in losses.

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Re: Avoid taking Dividends?

Post by avalpert » Mon Jun 19, 2017 1:06 pm

mortfree wrote:Is this a strategy (avoiding dividends) for the average person or is this one of those whole other level investor kind of thing?

Also, I can't imagine having 200k in losses.
It's for people who have lot's of time, lot's of accumulated losses, high tax bracket and have a low threshold for what they consider worth putting in effort for. It isn't for the average investor, it isn't for most investors at higher levels - it really is for tinkerers who need an outlet for their tinkering.

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Re: Avoid taking Dividends?

Post by livesoft » Mon Jun 19, 2017 1:09 pm

mortfree wrote:Also, I can't imagine having 200k in losses.
Easy for investors for taxable accounts in 2008-2009.

One doesn't need to be in a high tax bracket either. The same people who contemplate tax-gain harvesting in a low tax bracket can benefit by not buying the dividend if they have carryover losses and want to do Roth conversions. :)

In essence, one is converting potential dividends into capital gains that are offset by tax-loss harvesting. If you've got the losses, you might as well use them up to get money into Roths.
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Re: Avoid taking Dividends?

Post by triceratop » Mon Jun 19, 2017 1:18 pm

avalpert wrote:
mortfree wrote:Is this a strategy (avoiding dividends) for the average person or is this one of those whole other level investor kind of thing?

Also, I can't imagine having 200k in losses.
It's for people who have lot's of time, lot's of accumulated losses, high tax bracket and have a low threshold for what they consider worth putting in effort for. It isn't for the average investor, it isn't for most investors at higher levels - it really is for tinkerers who need an outlet for their tinkering.
I did something similar today (in the thread that the OP found that quote). I switched VXUS to IXUS for tax reasons. It was theoretically possible to avoid the IXUS dividend as well, but I do not care because the tax impact of the IXUS dividend is approximately $0-1.

Oh, and I have no accumulated losses and am not in a high tax bracket.

I consider myself an average investor.
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Re: Avoid taking Dividends?

Post by avalpert » Mon Jun 19, 2017 1:35 pm

triceratop wrote:
avalpert wrote:
mortfree wrote:Is this a strategy (avoiding dividends) for the average person or is this one of those whole other level investor kind of thing?

Also, I can't imagine having 200k in losses.
It's for people who have lot's of time, lot's of accumulated losses, high tax bracket and have a low threshold for what they consider worth putting in effort for. It isn't for the average investor, it isn't for most investors at higher levels - it really is for tinkerers who need an outlet for their tinkering.
I did something similar today (in the thread that the OP found that quote). I switched VXUS to IXUS for tax reasons. It was theoretically possible to avoid the IXUS dividend as well, but I do not care because the tax impact of the IXUS dividend is approximately $0-1.

Oh, and I have no accumulated losses and am not in a high tax bracket.

I consider myself an average investor.
I would consider making a shift to save 10bp of tax efficiency based on last years numbers (which may or may not hold going forward) to be behavior highly associated with tinkerers looking for an outlet for their tinkering (not that there is anything wrong with that, as long as the outlets carry low cost and risk).

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Re: Avoid taking Dividends?

Post by triceratop » Mon Jun 19, 2017 1:40 pm

The savings was 14bp in 2015, too; I didn't base it entirely on last year's number. It is a well-replicated feature of iShares foreign funds.

I'll only note that if the expense ratio of a fund changed by 10bp, many Bogleheads' hair would surely be on fire, similar if a fund was introduced with a 10bp lower ER. It is peculiar to me the same logic is not applied to tax.
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Re: Avoid taking Dividends?

Post by avalpert » Mon Jun 19, 2017 1:54 pm

triceratop wrote:The savings was 14bp in 2015, too; I didn't base it entirely on last year's number. It is a well-replicated feature of iShares foreign funds.

I'll only note that if the expense ratio of a fund changed by 10bp, many Bogleheads' hair would surely be on fire. It is peculiar to me the same logic is not applied to tax.
I think people who are jumping back and forth between Vanguard/Fidelity/Schwab funds as they leapfrog each other for the lowest ER are also tinkerers looking for an outlet - as far as outlets go, at least it is usually relatively harmless.

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Re: Avoid taking Dividends?

Post by goingup » Mon Jun 19, 2017 2:02 pm

chabil wrote:Livesoft:
A consequence is that the mutual fund shareholder received the information too late to make an informed decision about avoiding the dividend. The ETF shareholder can sell the ETF shares and buy the mutual fund shares on Monday 6/13 and avoid the dividend.

...
Bonus comment: Folks who tax-loss harvested VTSAX and exchanged into VFIAX can avoid the dividends of both these funds by exchanging back from VFIAX into VTSAX early next week. I'm not sure why one would want to do that though with the nice gains that they should have after the TLHing.
This is so totally new to me. We have always reinvested all dividends either into the same or another fund in both taxable and tax-deferred accounts. I do TLH in taxable accounts. I have never heard of AVOIDING dividends, and I presume in taxable account. Obviously I have a lot to learn. I can see this will reduce taxes on the income but I cannot still get my head around not taking the dividends.

Can someone please explain this and how it works or point to any links that I can read. Thank you so much.
chabil-
Do what you will, but there aren't a lot of people on this forum who try to go through the gyrations of avoiding dividends. If you're a hobbyist, a tinkerer, a person who thinks his/her catlike reflexes can attain some advantage, go for it. Some techniques that you read here should have a posted disclaimer, "Stunt drivers on closed track. Do not try this at home." :D

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Re: Avoid taking Dividends?

Post by livesoft » Mon Jun 19, 2017 2:05 pm

For the record, I'm not avoiding dividends by this technique here in June 2017.

EtA: However, if I had to sell some shares in order to pay my June and July bills, then I would look carefully to see if I could avoid dividends when I sold. This is because dividends get added to my AGI, while capital gains do not.
Last edited by livesoft on Mon Jun 19, 2017 3:46 pm, edited 2 times in total.
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2015
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Re: Avoid taking Dividends?

Post by 2015 » Mon Jun 19, 2017 2:40 pm

avalpert wrote:
triceratop wrote:
avalpert wrote:
mortfree wrote:Is this a strategy (avoiding dividends) for the average person or is this one of those whole other level investor kind of thing?

Also, I can't imagine having 200k in losses.
It's for people who have lot's of time, lot's of accumulated losses, high tax bracket and have a low threshold for what they consider worth putting in effort for. It isn't for the average investor, it isn't for most investors at higher levels - it really is for tinkerers who need an outlet for their tinkering.
I did something similar today (in the thread that the OP found that quote). I switched VXUS to IXUS for tax reasons. It was theoretically possible to avoid the IXUS dividend as well, but I do not care because the tax impact of the IXUS dividend is approximately $0-1.

Oh, and I have no accumulated losses and am not in a high tax bracket.

I consider myself an average investor.
I would consider making a shift to save 10bp of tax efficiency based on last years numbers (which may or may not hold going forward) to be behavior highly associated with tinkerers looking for an outlet for their tinkering (not that there is anything wrong with that, as long as the outlets carry low cost and risk).
I would agree, and have discovered one could spend one's retirement life away "tinkering". For example, one could tinker with risk management of all kinds, end of life, family, and estate planning, online security, health optimization, physical safety and security, lifestyle fulfillment design, making changes to one's financial plans based on yet the latest study or favored BH guru's book, blog post, or proclamation--the list seems endless. I in fact spent much of this morning changing my network security key and bringing all devices back online---one might say I was tinkering with network and internet security (again!).

OTOH, it took no tinkering at all last month to take a lovely Amtrak Coastliner round trip to Portland, to attend an amazing event this Saturday followed by a wonderful pool party on Sunday with my favorite person in the world (SO).

Moderation, as they say, in all things.

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Re: Avoid taking Dividends?

Post by 2015 » Mon Jun 19, 2017 2:46 pm

On the dangers of tinkering:

Munger on Making Decisions within Our “Strikezone”
: We all have a strike zone, this is our circle of competence. This is an area in which we are capable of understanding with a high degree of probability the relevant variables and likely outcome. Making decisions within our circle improves the odds we’ll do well. This is our sweet spot and it’s different for all of us. The problem is everyone wants to have a large circle. We think bigger is better. But the size of the circle is not really what’s most important. Knowing the boundaries of our circle of competence is more important than its size. Familiarity with something is different than competence. Charlie Munger says “It’s not a competency if you don’t know the edge of it.” In some decisions, such as investing, we can choose to do the same thing. We can sit around, read, and wait for the right opportunity. Most decisions, however, are not of that nature. We simply don’t have the option to wait for the perfect pitch. We have to make decisions in an uncertain world with imperfect information. Knowing the boundary of our aptitude, where we bat above average and where we don’t, can help guide those decisions and how we make them. Making decisions outside of our circle of competence (i.e., we don’t know what we’re doing) is riskier than making decisions inside our circle (i.e., where we do know what we’re doing.) Baseball great Ted Williams batting average dropped off when he swung outside his core, and so to will ours. If we have to decide something and we know we’re not in our sweet spot, we can take steps to improve the odds of making the a better decision. Or, at the very least, acknowledge that the decision we’re making is risky--we know we’re the patsy. Whatever decision you’re making, know where it falls in your strike zone. To the extent possible you should attempt to deal with things that you are capable of understanding.

Playing “Not to Lose” in Investing (and Life): Avoiding Stupidity is Easier than Seeking Brilliance. In tennis, there is a Winner’s Game and a Loser’s Game. Tennis (like investing) can be subdivided into two games: the professionals and the rest of us. Players in both games play by the same rules and scoring. They play on the same court. Sometimes they share the same equipment. In short the basic elements of the game are the same. Sometimes amateurs believe they are professionals but professionals never believe they are amateurs. But the games are fundamentally different. Professionals win points whereas amateurs lose them. The amateur duffer seldom beats his opponent, but he beats himself all the time. The victor in this game of tennis gets a higher score than the opponent, but he gets that higher score because his opponent is losing even more points. In expert tennis, about 80 per cent of the points are won; in amateur tennis, about 80 per cent of the points are lost. In other words, professional tennis is a Winner’s Game – the final outcome is determined by the activities of the winner – and amateur tennis is a Loser’s Game – the final outcome is determined by the activities of the loser. The two games are, in their fundamental characteristic, not at all the same. They are opposites. Ordinary players can win by losing less and letting the opponent defeat themselves…the strategy for winning is to avoid mistakes. The way to avoid mistakes is to be conservative and keep the ball in play, letting the other fellow have plenty of room in which to blunder his way to defeat, because he, being an amateur will play a losing game and not know it. If you’re an amateur your focus should be on avoiding stupidity.

Avoiding Stupidity: Most of us are amateurs but we refuse to believe it. This is a problem because we’re often playing the game of the professionals. What we should do in this case, when we’re the amateur, is play not to lose. Munger – “...try more to profit from always remembering the obvious than from grasping the esoteric. … It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. There must be some wisdom in the folk saying, `It’s the strong swimmers who drown.’”

via Negativa: It is the negative that’s used by the pros, those selected by evolution - chess grandmasters usually win by not losing; people become rich by not going bust (particularly when others do); religions are mostly about interdicts; the learning of life is about what to avoid. You reduce most of your personal risks of accident thanks to a small number of measures. The greatest— and most robust— contribution to knowledge consists in removing what we think is wrong— subtractive epistemology. In life, antifragility is reached by not being a sucker. We know a lot more of what is wrong than what is right, or, phrased according to the fragile/robust classification, negative knowledge (what is wrong, what does not work) is more robust to error than positive knowledge (what is right, what works). So knowledge grows by subtraction much more than by addition— given that what we know today might turn out to be wrong but what we know to be wrong cannot turn out to be right, at least not easily. This is a subtractive strategy.

Via Negativia Is Superior To Via Positivia: Iatrogenics comes from intervention bias, via Positiva, the propensity to want to do something, causing more problems than existed before the intervention. On the other hand ,via negativa, the removing of things, can be quite a potent (and, empirically, a more rigorous) action. If true wealth consists in worriless sleeping, clear conscience, reciprocal gratitude, absence of envy, good appetite, muscle strength, physical energy, frequent laughs, no meals alone, some physical labor (or hobby), good bowel movements, no meeting rooms, and periodic surprises, then it is largely subtractive (elimination of iatrogenics).

Naive Intervention And Iatrogenics: Iatrogenics is Greek for “caused by the healer.” We have predisposition to do something instead of nothing even when nothing may be the better option. We create fragile systems in our attempt to reduce volatility in the short term. (for example, iatrogenics is not linear. We should not take risks with near-healthy people; but we should take a lot, a lot more risks with those deemed in danger). Causes are lack of clear feedback loops between action and outcome, and the treacherous condition in which the benefits are small, and visible— and the costs very large, delayed, and hidden, and are much worse than the cumulative gains (e.g., Kenye West’s plastic surgery opertion to improve her appearance resulted in her death). Combat by seeking disconfirming evidence to our actions, by thinking through unintended consequences, and by realizing sometimes no action is better than any action. “First evaluate the risks, then evaluate the gain.”

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Re: Avoid taking Dividends?

Post by triceratop » Mon Jun 19, 2017 3:40 pm

That is a lot of words spoken against tinkering. I expect I'll read fewer about why a nearly identical fund which costs 10bp more to own is a good idea.
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Re: Avoid taking Dividends?

Post by Levett » Mon Jun 19, 2017 3:59 pm

Thanks, 2015, for the Munger comments--really, really good stuff. :happy

Lev

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Re: Avoid taking Dividends?

Post by House Blend » Mon Jun 19, 2017 4:53 pm

On the list of Most Important Things for a Boglehead to Know this is probably #177 on the list, near the other opportunities to pick up nickels in front of a steamroller.

The simplest case is that you have a tax lot of shares of Fund A that you are thinking about tax loss harvesting, and a dividend from A is coming up.

If you can find a TLH partner fund B whose dividend distribution takes place *before* the next dividend for A, then you can consider TLHing from A to B in the window between the two dividends. In effect you would be getting the usual benefit of a harvested loss, plus you are avoiding the tax consequences (but not the benefits) of a dividend.

However, you could potentially harvest a bigger loss by selling after the dividend (assuming the market is flat or trending down).

So it is somewhat like analyzing the tradeoffs of whether you would rather have $X more QDI if it came with $X more in capital losses. The answer will depend on your tax situation and in particular whether the dividends really are 100% QDI.

If you have to realize large gains to avoid the dividend, then you also need to have carryover losses to cancel the gains out for it to have a chance to makes sense.

For example, suppose you have to realize $10,000 in gains to avoid a $1,000 dividend. If the market is flat while you are doing this, your options are to accept a $1,000 dividend, $9,000 in unrealized gains, and $10,000 in unused carryover losses, versus no dividend, and an investment that is worth $1,000 more and has no unrealized gains.

In some sense this is like the previous tradeoff, except that you are also burning $9,000 of your carryover losses. This is less likely to make sense unless you are running out of possible uses for your carryover losses.

Funny thing here is that the tinkering perspective is upside down. If you ask a TLHer if he would trade his existing taxable portfolio for one with the same risk exposures, ER, and value, but with $100K more in carryover losses and $100K more in unrealized gains, the answer would be "Of course! You have more options that way".

In this scenario, the do-nothing approach is the one that leaves more options on the table. Avoiding the dividend means that you are using up some of your options.

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Re: Avoid taking Dividends?

Post by livesoft » Mon Jun 19, 2017 4:58 pm

^That is all true, but I wish to reiterate that the point is to avoid dividends being added to AGI in the first place.

For folks who are pushing up against some AGI level for ACA subsidies and IRMAA and EITC and other things, then it might be worth the trouble.

Or maybe the dividend comes from a foreign fund and one might be bumped over the $600-per-couple foreign tax credit issue.

Or maybe one is at the 46.5% tax marginal tax on SS benefits.
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Re: Avoid taking Dividends?

Post by House Blend » Mon Jun 19, 2017 5:14 pm

livesoft wrote:^That is all true, but I wish to reiterate that the point is to avoid dividends being added to AGI in the first place.
Agreed. I'm not arguing that it never makes sense, just pointing out where the tradeoffs are. YTSMV. (Your Tax Situation May Vary.)

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Re: Avoid taking Dividends?

Post by chabil » Sun Jun 25, 2017 3:00 pm

livesoft wrote:
mortfree wrote:Also, I can't imagine having 200k in losses.
Easy for investors for taxable accounts in 2008-2009.

One doesn't need to be in a high tax bracket either. The same people who contemplate tax-gain harvesting in a low tax bracket can benefit by not buying the dividend if they have carryover losses and want to do Roth conversions. :)

In essence, one is converting potential dividends into capital gains that are offset by tax-loss harvesting. If you've got the losses, you might as well use them up to get money into Roths.
Ok, so not all dividends are equal. I know the dividends that are paid from our pure stock (they have very low cost basis so we don't ever plan on selling them) holding are ALL qualified which means they are taxed at 15%, just like cap. gains. Please correct me if I am wrong.
Most, not all, dividends from VTSMX (total stock mkt IX) are also qualified.
We have some Wellington which I think gives us ordinary dividends. I have been trying to get rid of the shares and set off against TLH.
So in essence I only need to focus on those funds that give us ordinary dividends and see how I can avoid those dividends.
Of course qualifies dividends are still income and cannot be set off against losses.

PS: I like tinkering as long as I can keep what I am doing straight. I stop when it gets too confusing or stresses me.

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Re: Avoid taking Dividends?

Post by grabiner » Sun Jun 25, 2017 8:57 pm

livesoft wrote:Suppose you only invested in BerkshireHathaway which is a conglomerate stock that pays no dividends. This means that you do not get income reported on Schedule B the bottom half and you do not have income on Form 1040 Lines 9a and 9b. It means that your AGI does not include those items.

Why might this be important? If your other income is such that any extra income causes you to lose out on tax credits or bumps you into a higher tax bracket or affects your ACA credit or whatever, then this might be important to you. Or if you want to convert more of a traditional IRA to a Roth IRA while staying in a lower tax bracket, then you would want less AGI.

Of course, you can say, "Wow, I avoid dividends, so I have less income to spend. I'm screwed."

Not necessarily. This is where previous tax-loss harvesting comes into play.
Even if you don't have tax loss harvesting, you are better off not receiving the dividend. If you receive a $10,000 dividend, you pay tax on $10,000. If you sell $10,000 worth of stock, you have $10,000 to spend, but you pay tax only on your capital gain, and the tax rate is the same as on qualified dividends if your gain is long term.
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