High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

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ThisJustIn
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Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by ThisJustIn » Sat Apr 13, 2019 4:18 pm

inbox788 wrote:
Tue Apr 09, 2019 6:01 pm
I just switch some taxable investment to tax-free municipal bonds. You might also consider Municipal Money Market Funds.

https://investor.vanguard.com/mutual-fu ... file/VMSXX
https://fundresearch.fidelity.com/mutua ... /316048107

As far as tax withholding, you might need to adjust your W4 allowances. What are you claiming now? You could go to zero.

Also, figure out if your tax liability is coming from your W2 and not enough or something else (such as capital gains or dividends where you should be paying estimated taxes). I made no W4 changes and I think I'm my overpayment went up this year compared to last, but it's complicated because a lot of other things changed too.
Going back to this Municipal Money Market Funds (https://investor.vanguard.com/mutual-fu ... file/VMSXX) for short-term investments:

I see that it is federal-tax-exempt. Is it state-tax-exempt, too? (For me, state tax is 10.3%, in CA.).

Also, I will be withdrawing 2.5K every week from this account, will that trigger any ordinary income tax? Or is the tax implication similar to that of online savings accounts?

Another question: Expense ratio is 0.15%, and return is 1.47%. For a short-term investment, when there are alternatives like CIT-bank with 2.45% return (not federal-tax-exempt or state-tax-exempt), do you still see Municipal Money Market Fund being a good option for my tax bracket (35% federal tax, 10.3% state tax).

inbox788
Posts: 6152
Joined: Thu Mar 15, 2012 5:24 pm

Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by inbox788 » Sat Apr 13, 2019 4:39 pm

ThisJustIn wrote:
Sat Apr 13, 2019 4:18 pm
inbox788 wrote:
Tue Apr 09, 2019 6:01 pm
I just switch some taxable investment to tax-free municipal bonds. You might also consider Municipal Money Market Funds.

https://investor.vanguard.com/mutual-fu ... file/VMSXX
https://fundresearch.fidelity.com/mutua ... /316048107

As far as tax withholding, you might need to adjust your W4 allowances. What are you claiming now? You could go to zero.

Also, figure out if your tax liability is coming from your W2 and not enough or something else (such as capital gains or dividends where you should be paying estimated taxes). I made no W4 changes and I think I'm my overpayment went up this year compared to last, but it's complicated because a lot of other things changed too.
Going back to this Municipal Money Market Funds (https://investor.vanguard.com/mutual-fu ... file/VMSXX) for short-term investments:

I see that it is federal-tax-exempt. Is it state-tax-exempt, too? (For me, state tax is 10.3%, in CA.).

Also, I will be withdrawing 2.5K every week from this account, will that trigger any ordinary income tax? Or is the tax implication similar to that of online savings accounts?

Another question: Expense ratio is 0.15%, and return is 1.47%. For a short-term investment, when there are alternatives like CIT-bank with 2.45% return (not federal-tax-exempt or state-tax-exempt), do you still see Municipal Money Market Fund being a good option for my tax bracket (35% federal tax, 10.3% state tax).
I believe so as far as no federal, but you need VCTXX for nostate tax. The comparison on return versus taxable is adjusted to your tax bracket. Like all money market funds, there's a theoretical possibility they're unable to maintain the $1 goal, but looks like they've kept this one stable. Since you're buying and selling dollar for dollar, there is not gain or loss.

Those yields and returns quoted always confused me, and I think they're after the expense fees, but not positive. Anyway, they're short term ("The SEC yield for a money market fund is calculated by annualizing its daily income distributions for the previous 7 days.") and fluctuate, both up and down vs. savings rates that change vs. CDs that are fixed for longer periods. Choose your poison. If you do some simple math and invest $10,000 at 1.47% for a year, you'd get $147 after tax and owe $15.14 to California, so $132 net. VCTXX at 1.35% nets you $135, so marginally better. CIT-bank at 2.45% gets $245 - 85.75 - 25.24 = $134. (does NIIT apply here? if so, subtract $9!) All in the same ballpark. If you're close to thresholds, the munis might reduce your income a little to help a bit more.

https://personal.vanguard.com/us/funds/ ... ton2=3#res

https://investor.vanguard.com/mutual-fu ... file/VCTXX

WillRetire
Posts: 138
Joined: Mon Jun 05, 2017 10:01 am

Re: High Federal Taxes this year: Tips on reducing taxes, particularly of short-term investments

Post by WillRetire » Sun Apr 14, 2019 10:30 am

ThisJustIn wrote:
Wed Apr 10, 2019 10:01 pm
inbox788 wrote:
Tue Apr 09, 2019 6:01 pm
I just switch some taxable investment to tax-free municipal bonds. You might also consider Municipal Money Market Funds.

https://investor.vanguard.com/mutual-fu ... file/VMSXX
https://fundresearch.fidelity.com/mutua ... /316048107

As far as tax withholding, you might need to adjust your W4 allowances. What are you claiming now? You could go to zero.

Also, figure out if your tax liability is coming from your W2 and not enough or something else (such as capital gains or dividends where you should be paying estimated taxes). I made no W4 changes and I think I'm my overpayment went up this year compared to last, but it's complicated because a lot of other things changed too.
I already have tax-exempt muni bonds in my taxable accounts.

I use online savings account and treasury bills for short-term investments. Are you recommending that "Municipal Money Market Fund" will be more tax-efficient than treasury bills (which are state-tax-exempt)?

"You might need to adjust your W4 allowances" => How do I do that?
On the W4 form, you can increase the # of allowances (to have more $ withheld). You can also leave the # of allowances alone and simply withheld an additional $ figure per pay check. See line 6 of the W-4. This method makes withholding changes more predictable than fiddling with the # of allowances.

For example, as you estimate 2019 tax liability, compare it with the amount of taxes currently withheld from your pay check. If you were to leave everything alone, you might compute that you will be $12K short for 2019 (just as an example). If you submit an updated W4 that takes effect in May, you'll have 9 months at the new withholding. Since in this example you need to make up $12K shortfall over 9 months, that's an additional withholding of $1333 per month, or, if you are paid twice a month, $666 per paycheck. So, in W4 line 6 put $666.

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