Taxes from dividends getting high.. how to handle?

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slalom
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Taxes from dividends getting high.. how to handle?

Post by slalom » Fri Jun 22, 2018 6:56 pm

I'm at the point where my dividend yields are substantial (and growing) every year.

Every platform I can, I re-invest dividends - including taxable accounts.

The taxes required from them are starting to lower my tax refund every year to the point that soon I'll be owing at EoY..

I'm imagining into the future earning more and more on them and having to keep changing my W4 to take out more from my paycheck to not owe..

I'm wondering how you guys handle this? I hate 'withdrawing', ever, so I hate the idea of taking money out of savings to pay for taxes. I also budget every penny into various investments in addition to my normal expenses so I don't have big chunks left over at tax time to pay for taxes. In fact I've usually assumed the refunds will be there.

There doesn't seem to be anything like 're-invest this % of dividends but leave the rest in cash' - if I could do that I'd use that chunk to pay the taxes and it would always be approximately the correct amount and would be earmarked.

Just wondering if you any of you have thoughts on this..

mcraepat9
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Re: Taxes from dividends getting high.. how to handle?

Post by mcraepat9 » Fri Jun 22, 2018 7:03 pm

What sort of funds are you using in your taxable account? Have you considered holding dividend-heavy funds in your tax-advantaged accounts and holding low-dividend funds in your taxable account?
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oldcomputerguy
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Re: Taxes from dividends getting high.. how to handle?

Post by oldcomputerguy » Fri Jun 22, 2018 7:05 pm

Not ideal, but you could just send dividends to your settlement fund, then pull out what cash you think you may need for taxes and manually re-invest what's left.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

livesoft
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Re: Taxes from dividends getting high.. how to handle?

Post by livesoft » Fri Jun 22, 2018 7:08 pm

Not much that one can do if they want to keep those investments.

Don't reinvest the dividends back into investments that pay high dividends. Choose investments that pay a higher percentage of qualified dividends and virtually no non-qualified dividends.

Examples: Choose VEA instead VXUS. Choose VV instead of VTI.
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remomnyc
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Re: Taxes from dividends getting high.. how to handle?

Post by remomnyc » Fri Jun 22, 2018 7:09 pm

This is what I do. There may be better ways. Make sure all your dividends taxed at ordinary income rates are in tax deferred accounts and only qualified dividends taxed at capital gains rates are in taxable accounts. Have dividends in tax deferred reinvest but dividends in taxable go to cash. You can then use dividends in taxable to pay taxes or to rebalance. If your dividends get way too high, maybe you need to retire early.

47Percent
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Re: Taxes from dividends getting high.. how to handle?

Post by 47Percent » Fri Jun 22, 2018 7:12 pm

I really don't understand what the problem is.

What is wrong in having some of the dividends pay out in cash and re-investing manually? I am assuming you don't have 100% of the money in one stock or mutual fund.

It would also free up some cash for re-balancing. Yes it will involve some intervention 4 times a year for about 10 minutes. May be less time than poring over the answers in this thread.

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FiveK
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Re: Taxes from dividends getting high.. how to handle?

Post by FiveK » Fri Jun 22, 2018 7:27 pm

slalom wrote:
Fri Jun 22, 2018 6:56 pm
The taxes required from them are starting to lower my tax refund every year to the point that soon I'll be owing at EoY..

I'm imagining into the future earning more and more on them and having to keep changing my W4 to take out more from my paycheck to not owe..

I'm wondering how you guys handle this? I hate 'withdrawing', ever, so I hate the idea of taking money out of savings to pay for taxes.
Which do you hate less: changing the W4 or owing some amount when you file?

You need change the W4 at most once per year if you use one of the safe harbor rules (i.e., avoid the need to pay estimated tax as described in that link).

Also, you are giving the IRS an interest-free loan when you get a refund when filing.

PhilosophyAndrew
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Re: Taxes from dividends getting high.. how to handle?

Post by PhilosophyAndrew » Fri Jun 22, 2018 7:43 pm

OP, will your tax-deferred investments provide for your retirement and other needs? If so, you could transfer the taxable assets to a DAF to fund your charitable giving.

If you are mainly concerned with avoiding excessive dividend income growth, you could donate enough assets to a DAF to keep that income where you want it.

Perhaps this problem provides an opportunity to give more to worthy charities!

Andy.

AlwaysWannaLearn
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Re: Taxes from dividends getting high.. how to handle?

Post by AlwaysWannaLearn » Fri Jun 22, 2018 7:50 pm

.....
Last edited by AlwaysWannaLearn on Wed Jul 18, 2018 11:23 pm, edited 1 time in total.

DaBombCat
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Re: Taxes from dividends getting high.. how to handle?

Post by DaBombCat » Fri Jun 22, 2018 10:05 pm

Slalom,
If you expect your income to fall between $38k-$425k as a single filer, then you reserve 15% of your expected dividends for taxes ($77k-$479k filing jointly). Anything above that range and you should reserve 20-24%.

Having dividend income is much better than employment (W2) income. The tax rates are a lot lower in most cases, and you don’t pay ss/medicare tax—saving another 15.3%!

There are two cases that I know of that dividends are taxed at ordinary employment income rates: ordinary REIT and ordinary BDC dividends. But, these companies do not pay any corporate tax so they have a lot more cash to distribute. The math on REITs & BDCs works out that anyone with income under $425 single/$479 joint ends up with a lower after-tax investment return compared to qualified dividends and cap gains. And, you still don’t pay ss/medicare tax.

The fact that your dividend growth is becoming a problem is just one example of the power and stability of dividend investing. You are in an enviable position.

22twain
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Re: Taxes from dividends getting high.. how to handle?

Post by 22twain » Fri Jun 22, 2018 11:06 pm

DaBombCat wrote:
Fri Jun 22, 2018 10:05 pm
ordinary BDC dividends
BDC = ? :confused

Dividends from bond funds (at least the ones that I know about) are not "qualified" and are subject to tax at the rate for ordinary income. Is that what you're referring to?
My investing princiPLEs do not include absolutely preserving princiPAL.

DaBombCat
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Re: Taxes from dividends getting high.. how to handle?

Post by DaBombCat » Fri Jun 22, 2018 11:19 pm

22twain wrote:
Fri Jun 22, 2018 11:06 pm
DaBombCat wrote:
Fri Jun 22, 2018 10:05 pm
ordinary BDC dividends
BDC = ? :confused

Dividends from bond funds (at least the ones that I know about) are not "qualified" and are subject to tax at the rate for ordinary income. Is that what you're referring to?
22twain,

BDC=business development company
These are a special category of finance companies that are exempt from corporate taxes if they distribute the equivalent of their net income. They usually lend to middle market companies—those that are too big for traditional bank loans and too small to raise money through corporate bond markets. BDCs tend to have high dividends, but they can be very hard to analyze because they do not have to give specifics about the companies or products that they invest in. Often, one does not know how good their investments are until they sell them or write down the value for a loss. All this was probably way more than you wanted to know. :shock:

dbr
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Re: Taxes from dividends getting high.. how to handle?

Post by dbr » Sat Jun 23, 2018 9:46 am

1. You should not be getting a refund from the IRS. You are already withholding too much. So right now your problem is getting better rather than worse.

2. If you do end up owing too much on your tax return, then, yes, you change your W-4. That is routine.

3. We don't know what you are invested in and what dividends you are talking about. If you were to post that people might or might not have some suggestions. Getting withholding or estimated tax payments right for ordinary tax efficient investments is just a routine part of managing money.

RickBoglehead
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Re: Taxes from dividends getting high.. how to handle?

Post by RickBoglehead » Sat Jun 23, 2018 12:41 pm

1) Reduce your withholding so that you're only giving the IRS what you're legally required to give them. If your income grows each year due to dividends, simply withhold the amount of tax to meet the minimum threshold of 100% of last year's taxes.

2) Have all your dividends put into your settlement account, and then reinvest manually, keeping any funds you need (for example to pay next year's taxes) in a money market account. Simple tracking of your dividends and budgeting will allow you to have the funds on hand to pay your taxes.

3) Shift your reinvestments, by the manual method, to go into funds that don't pay as high dividends, assuming you don't need the total return that those funds give you.

If I ever get a refund from the IRS or the state, I know I've done a poor job of forecasting. For 2018, I expect to have a very large tax bill as I'm paying the minimum (100% of last year's tax) and earning more. I won't pay that until the due date.

livesoft
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Re: Taxes from dividends getting high.. how to handle?

Post by livesoft » Sat Jun 23, 2018 12:51 pm

This idea that getting a refund from the IRS is bad is just bunk. Consider two cases:

1. You don't get a refund, but invest the money instead. And your investments lose money. In that case, getting a refund would have helped prevent you from losing money.

2. Tax prep software companies give you a 10% bonus on your refund. That's like investing in a high-yield savings account that pays 10%. I don't think anybody would complain if they could invest their money in a high-yield savings account that pays 10%.
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FiveK
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Re: Taxes from dividends getting high.. how to handle?

Post by FiveK » Sat Jun 23, 2018 2:11 pm

livesoft wrote:
Sat Jun 23, 2018 12:51 pm
This idea that getting a refund from the IRS is bad is just bunk. Consider two cases:

1. You don't get a refund, but invest the money instead. And your investments lose money. In that case, getting a refund would have helped prevent you from losing money.

2. Tax prep software companies give you a 10% bonus on your refund. That's like investing in a high-yield savings account that pays 10%. I don't think anybody would complain if they could invest their money in a high-yield savings account that pays 10%.
That a refund is an interest-free loan to the IRS is a fact. Whether that is a positive or negative fact may be in the eye of the beholder, particularly a beholder wearing hindsight glasses.

H-Town
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Re: Taxes from dividends getting high.. how to handle?

Post by H-Town » Sat Jun 23, 2018 2:31 pm

slalom wrote:
Fri Jun 22, 2018 6:56 pm
I'm at the point where my dividend yields are substantial (and growing) every year.

Every platform I can, I re-invest dividends - including taxable accounts.

The taxes required from them are starting to lower my tax refund every year to the point that soon I'll be owing at EoY..

I'm imagining into the future earning more and more on them and having to keep changing my W4 to take out more from my paycheck to not owe..

I'm wondering how you guys handle this? I hate 'withdrawing', ever, so I hate the idea of taking money out of savings to pay for taxes. I also budget every penny into various investments in addition to my normal expenses so I don't have big chunks left over at tax time to pay for taxes. In fact I've usually assumed the refunds will be there.

There doesn't seem to be anything like 're-invest this % of dividends but leave the rest in cash' - if I could do that I'd use that chunk to pay the taxes and it would always be approximately the correct amount and would be earmarked.

Just wondering if you any of you have thoughts on this..
It sounds like mental accounting. Money is fungible. Whether you withhold it from your paycheck or sell it from your taxable account, it's still money. Do what you're comfortable with doing. If it were me, I would not over-withholding and let the IRS have interest-free money. I would defer to pay tax on April 15 next year.

Really.. Having to pay more tax because you're making more money is a blessing.

dbr
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Re: Taxes from dividends getting high.. how to handle?

Post by dbr » Sat Jun 23, 2018 2:33 pm

FiveK wrote:
Sat Jun 23, 2018 2:11 pm
livesoft wrote:
Sat Jun 23, 2018 12:51 pm
This idea that getting a refund from the IRS is bad is just bunk. Consider two cases:

1. You don't get a refund, but invest the money instead. And your investments lose money. In that case, getting a refund would have helped prevent you from losing money.

2. Tax prep software companies give you a 10% bonus on your refund. That's like investing in a high-yield savings account that pays 10%. I don't think anybody would complain if they could invest their money in a high-yield savings account that pays 10%.
That a refund is an interest-free loan to the IRS is a fact. Whether that is a positive or negative fact may be in the eye of the beholder, particularly a beholder wearing hindsight glasses.
In any case if you want a refund with your tax return just go online ahead of time and send in payment in any amount at any time. If you want the IRS to keep it for later you just keep applying the refund to the next year's taxes.

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1210sda
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Re: Taxes from dividends getting high.. how to handle?

Post by 1210sda » Sat Jun 23, 2018 2:46 pm

OP, Lots of good suggestions from fellow BH's.

If you still need more ideas, try the Vanguard Tax Managed Balanced Fund. (dependent on how high your tax bracket is, that you have at least $10,000 to invest, and can accept the~50/50 asset allocation).

Div yield is a little over 2%.....>than 1% in QDI and about 1.25% in tax exempt divs.

Just something else to consider.

1210

fourwheelcycle
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Re: Taxes from dividends getting high.. how to handle?

Post by fourwheelcycle » Sat Jun 23, 2018 3:09 pm

I don't know what OP's income or dividends are, but I have always set taxable dividends to reinvest and I have never had a problem. When we were working my wife kept her W4 marked at one married allowance, which put all the withholding pressure on my pay check. I always set my W4 to include an additional dollar amount. In order to keep ahead of the IRS' safe harbor rules I used to call our payroll office each year after I finalized my income taxes and tell them a new additional dollar amount.

When I retired at 60 (and my wife kept working to support me!) I set my pension at 40% to me and 60% to withholding, which always put us pretty close on our total taxes owed. Now that we are turning 70 our delayed SS and required RMDs will give us more than enough cash flow for taxes on our reinvested dividends.

gerntz
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Re: Taxes from dividends getting high.. how to handle?

Post by gerntz » Sat Jun 23, 2018 3:48 pm

If you don't want div income, invest in low div growth stocks. The income comes from selling the stocks - when you wish to have the income.

slalom
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Re: Taxes from dividends getting high.. how to handle?

Post by slalom » Sat Jun 23, 2018 6:33 pm

Thank you all for all the great responses and ideas. I don't want to respond individually to them all and have the thread get chaotic, however I did want to address a couple things:

Regarding a tax refund - Yes as I've gotten more bogleheady I have considered changing withholding to avoid a refund, however since every year my refund has been going down significantly (lower mortgage interest because I'm paying more and more extra on it, capital loss carryover drying up, more dividends, now SALT cap, etc.) I didn't want to do anything drastic and end up owing, which I absolutely hate.

When I mentioned that, I was more worried about the future, where I end up withholding more and more due to the dividends and my take home pay is getting drastically reduced.

I know part of it is psychological. When I mentioned dividend reinvestment, I meant i have AUTO re-investment and was wishing there was a way I could say 'auto-reinvest 85% and keep 15% in cash' to the auto-investing feature. I love things being on autopilot generally and just checking balances to make sure I'm on track. I don't have time to actively make changes like many of you enjoy doing, and even having to do something a handful of times a year feels onerous.

But I think I still need to do something in-between, which is make sure to reinvest in qualified dividend funds when possible, and change withholding at least yearly.

And yes, I do realize it's a good problem to have :)

Darth Xanadu
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Re: Taxes from dividends getting high.. how to handle?

Post by Darth Xanadu » Sat Jun 23, 2018 8:21 pm

slalom wrote:
Sat Jun 23, 2018 6:33 pm
When I mentioned dividend reinvestment, I meant i have AUTO re-investment and was wishing there was a way I could say 'auto-reinvest 85% and keep 15% in cash' to the auto-investing feature.
I'm not sure what your holdings are but couldn't you set some to reinvest and some not ... such that about 15% of total dividends are paid out? Might require adding a different fund to practically allow for this.
"A courageous teacher, failure is."

retired early&luv it
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Re: Taxes from dividends getting high.. how to handle?

Post by retired early&luv it » Sat Jun 23, 2018 8:28 pm

Every year when I was working, I changed my withholding to make sure I did not have any penalties for under withholding. And I was putting in the legal maximum into a 457 plan (govt employee equivalent to a 401k). Plus funding a Roth IRA to the legal maximum. That meant that I had very little take home pay. During the years when my take home salary was not enough to cover my expenses, I withdrew cash from my taxable investment account to live off of. It is not a big deal.

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cookymonster
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Re: Taxes from dividends getting high.. how to handle?

Post by cookymonster » Sat Jun 23, 2018 10:04 pm

dbr wrote:
Sat Jun 23, 2018 2:33 pm
FiveK wrote:
Sat Jun 23, 2018 2:11 pm
livesoft wrote:
Sat Jun 23, 2018 12:51 pm
This idea that getting a refund from the IRS is bad is just bunk. Consider two cases:

1. You don't get a refund, but invest the money instead. And your investments lose money. In that case, getting a refund would have helped prevent you from losing money.

2. Tax prep software companies give you a 10% bonus on your refund. That's like investing in a high-yield savings account that pays 10%. I don't think anybody would complain if they could invest their money in a high-yield savings account that pays 10%.
That a refund is an interest-free loan to the IRS is a fact. Whether that is a positive or negative fact may be in the eye of the beholder, particularly a beholder wearing hindsight glasses.
In any case if you want a refund with your tax return just go online ahead of time and send in payment in any amount at any time. If you want the IRS to keep it for later you just keep applying the refund to the next year's taxes.
H&R block's refund bonus is 5% - is there a different software that offers 10%? The max bonus is $250, but the software costs $30 for me, so the net is $220, 4.4% bonus. However that would require me to accumulate thousands of dollars in gift cards, which earn zero return until they are spent. I'll pass.

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