Total Stock Market Index - Section 199A dividends this year

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Makefile
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Total Stock Market Index - Section 199A dividends this year

Post by Makefile » Tue Jan 21, 2020 10:34 am

My 1099-DIV just posted.

Looks like Total Stock Market (VTSAX) dividends were about 93.8% qualified this year.
Looks like another 5.8% of dividends are section 199A (REIT?) dividends that I suppose are eligible for the 20% deduction. That's new this year.

(edit: "this year" meaning this tax season. 2019 taxes, of course)

cas
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Re: Total Stock Market Index - Section 199A dividends this year

Post by cas » Tue Jan 21, 2020 12:11 pm

Makefile wrote:
Tue Jan 21, 2020 10:34 am
My 1099-DIV just posted.

Looks like Total Stock Market (VTSAX) dividends were about 93.8% qualified this year.
Looks like another 5.8% of dividends are section 199A (REIT?) dividends that I suppose are eligible for the 20% deduction. That's new this year.
Thanks for the heads up. I'm surprised this thread isn't roaring away with people who have discovered a sudden interest in the details of the QBI deduction.

I know I've discovered a sudden, unanticipated interest in the QBI deduction. But after clicking through multiple IRS publications, I'm still not 100% sure how all this is going to play out. I hope Turbotax has it figured out properly. Given that some of the relevant IRS documents are still marked "Draft" for 2019, I have some sympathy for them.

(And then there is the issue of "Why 2019, but not 2018?" Google seems to think that the issue of how REIT potential-QBI income was handled by RICs was still in "new proposed regulation" form at this time last year, but I don't know if that is the answer or not.)

Edit: QBI = "Qualified Business Income". QBI deduction is new with the 2018 tax law.
RIC = "Registered Investment Company", an acronym used various places by the IRS, such as the foreign tax credit form. Mutual funds are one sort of RIC.
Last edited by cas on Fri Feb 14, 2020 7:15 pm, edited 2 times in total.

retiringwhen
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Re: Total Stock Market Index - Section 199A dividends this year

Post by retiringwhen » Tue Jan 21, 2020 12:15 pm

cas wrote:
Tue Jan 21, 2020 12:11 pm
I hope Turbotax has it figured out better than I do.
I just ran a test return with the 2019 Turbotax for a return that has VTSAX in it. There was no prompting or places on the data entry forms to identify the amount that could attributed to QBI. If it is there, it is hidden.

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Re: Total Stock Market Index - Section 199A dividends this year

Post by cas » Tue Jan 21, 2020 12:23 pm

retiringwhen wrote:
Tue Jan 21, 2020 12:15 pm
cas wrote:
Tue Jan 21, 2020 12:11 pm
I hope Turbotax has it figured out better than I do.
I just ran a test return with the 2019 Turbotax for a return that has VTSAX in it. There was no prompting or places on the data entry forms to identify the amount that could attributed to QBI. If it is there, it is hidden.
Did you put something in Box 5 in the 1099-DIV entry form? During my googling, I think I read an intuit/turbotax community forum post that said you have to expand out the "more boxes" part of that entry form, so you can see Box 5, if you are entering by hand.

I decided to wait until Vanguard has the 1099-DIVs ready for automatic download into Turbotax and then look to see what Turbotax does with it. And then try re-reading the IRS publications with the filled out forms in front of me. But given that the QBI deduction can be dependent on other aspects of the tax return, I would guess that the complete answer of what Turbotax does with Box 5 stuff may not be clear after just the 1099-DIVs are entered.

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Re: Total Stock Market Index - Section 199A dividends this year

Post by retiringwhen » Tue Jan 21, 2020 1:02 pm

cas wrote:
Tue Jan 21, 2020 12:23 pm
retiringwhen wrote:
Tue Jan 21, 2020 12:15 pm
cas wrote:
Tue Jan 21, 2020 12:11 pm
I hope Turbotax has it figured out better than I do.
I just ran a test return with the 2019 Turbotax for a return that has VTSAX in it. There was no prompting or places on the data entry forms to identify the amount that could attributed to QBI. If it is there, it is hidden.
Did you put something in Box 5 in the 1099-DIV entry form?
I did not, was doing a dirty attempt at an early estimate of the real return. After going back into the return, I see the field there when you click the advanced button. I'll play around and see what it does with the value.

Quick update: Turbotax fully flows the box 5 - Section 199A values onto form 8995 and their QBI worksheet. Seems to work great.

Now, this means when I do a model of tax-efficiency, there is yet another calculation. It seems to me like it is time for some tax-simplification again. Our tax-system is becoming prohibitively complex. Only because I consider tax-prep a hobby ( :oops: ) do I put up with it.

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Re: Total Stock Market Index - Section 199A dividends this year

Post by House Blend » Tue Jan 21, 2020 3:03 pm

retiringwhen wrote:
Tue Jan 21, 2020 1:02 pm
I did not, was doing a dirty attempt at an early estimate of the real return. After going back into the return, I see the field there when you click the advanced button. I'll play around and see what it does with the value.

Quick update: Turbotax fully flows the box 5 - Section 199A values onto form 8995 and their QBI worksheet. Seems to work great.

Now, this means when I do a model of tax-efficiency, there is yet another calculation. It seems to me like it is time for some tax-simplification again. Our tax-system is becoming prohibitively complex. Only because I consider tax-prep a hobby ( :oops: ) do I put up with it.
Yes, I just noticed the new Section 199A/Box 5 issue and found this thread by searching for 199A.

Can you post a screenscrape of how turbotax filled out Form 8995? Use fictitious numbers if you prefer.

After a spending a few minutes digging at the IRS, it looks like 95% of (the draft of) the instructions for Form 8995 are irrelevant for a TSM investor. It may take a while to figure out which 5% are relevant.

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Re: Total Stock Market Index - Section 199A dividends this year

Post by JDDS » Tue Jan 21, 2020 3:29 pm

Interesting.
Large cap index is showing about 2.84%

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Re: Total Stock Market Index - Section 199A dividends this year

Post by retiringwhen » Tue Jan 21, 2020 3:57 pm

House Blend wrote:
Tue Jan 21, 2020 3:03 pm
Can you post a screenscrape of how turbotax filled out Form 8995? Use fictitious numbers if you prefer.
TurboTax takes the value from the 1099-DIV box 5 and puts them in line 6 of form 8995, and then does the calculations on lines 8 and 9. It then pulls in data from other places to fill in rows 11-12 and calculates 13-14 and fills in the rest.

Line 11 comes from 1040 line 8b - line 9
Line 12 comes from 1040 line 3a as far as I can tell. (this seems odd and possibly even incorrect, not sure based on the names of the entries. it could also be my example which has a net capital loss for the year)

Basically, I think the gist is that you take the sum of all the box 5 inputs into line 6 and follow the bottom half of the page. Lines 1-5 only apply if you have other QBI from actual business activities you engage directly (or via an LLC).

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Re: Total Stock Market Index - Section 199A dividends this year

Post by House Blend » Tue Jan 21, 2020 4:00 pm

^Thanks!
JDDS wrote:
Tue Jan 21, 2020 3:29 pm
Large cap index is showing about 2.84%
FWIW, I think it is exactly 2.85% of the dividend (to the nearest penny), and 5.85% in the case of Total Stock.

Overall, for funds with a small percentage of REIT income, this amounts to a PITA. More tax complexity for a tiny benefit.

In the specific case of Large Cap Index, the decision (assuming Vanguard had a choice in the matter) to report 199A dividends is not even a tiny benefit. It's a tiny additional tax increase.

In the olden days (i.e., last year), the 97.15% of qualified dividends paid by this fund, since it is above 95%, would have been rounded up to 100%. This year, there was no rounding and one gets at best 20% off ones usual marginal rate on the 2.85% non-qualified dividends.

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Re: Total Stock Market Index - Section 199A dividends this year

Post by JDDS » Tue Jan 21, 2020 4:11 pm

House Blend wrote:
Tue Jan 21, 2020 4:00 pm

In the olden days (i.e., last year), the 97.15% of qualified dividends paid by this fund, since it is above 95%, would have been rounded up to 100%. This year, there was no rounding and one gets at best 20% off ones usual marginal rate on the 2.85% non-qualified dividends.
Thanks, I had not yet realized that 97.15% + 2.85% = 100%...I'll blame that thing called work that keeps distracting me from this somewhat interesting development. :)

for total stock then, there's a slight improvement because these 5.85% dividends are getting better treatment. It still seems painfully complex for that amount.

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Re: Total Stock Market Index - Section 199A dividends this year

Post by House Blend » Tue Jan 21, 2020 4:15 pm

For tax geeks who own Vanguard funds in a brokerage account and haven't seen their 1099's yet, you can reverse engineer your numbers by downloading this spreadsheet:
https://advisors.vanguard.com/VGApp/iip ... e=iciFiles

This reports all of the 2019 distribution details for all Vanguard funds, including the breakdown of qualified vs. non-qualified dividends, foreign taxes paid, and (ugh) Section 199A income.

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Re: Total Stock Market Index - Section 199A dividends this year

Post by retiringwhen » Tue Jan 21, 2020 4:32 pm

House Blend wrote:
Tue Jan 21, 2020 4:15 pm
For tax geeks who own Vanguard funds in a brokerage account and haven't seen their 1099's yet, you can reverse engineer your numbers by downloading this spreadsheet:
https://advisors.vanguard.com/VGApp/iip ... e=iciFiles

This reports all of the 2019 distribution details for all Vanguard funds, including the breakdown of qualified vs. non-qualified dividends, foreign taxes paid, and (ugh) Section 199A income.
Thanks, I found this file last year, but forgot where it was. This is the treasure trove. I am thinking I can automate some of my tax-efficiency calculations with this thing!

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Re: Total Stock Market Index - Section 199A dividends this year

Post by FactualFran » Tue Jan 21, 2020 4:40 pm

Another thanks for the heads up. I'll owe about $25 less with my tax return because of the Section 199A Dividends reported on the Form 1099-DIV from Vanguard.

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Re: Total Stock Market Index - Section 199A dividends this year

Post by boomer_techie » Wed Jan 22, 2020 2:54 am

retiringwhen wrote:
Tue Jan 21, 2020 3:57 pm
Line 12 comes from 1040 line 3a as far as I can tell. (this seems odd and possibly even incorrect, not sure based on the names of the entries. it could also be my example which has a net capital loss for the year)
Looking at the draft instructions, line 12 is poorly named. It appears to be the amount of income that is taxed at 0%/15%/20% rates. If there was a capital loss, then of course only qualified dividends (i.e. line 3a) would be taxed at those rates.

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Re: Total Stock Market Index - Section 199A dividends this year

Post by retiringwhen » Wed Jan 22, 2020 8:23 am

boomer_techie wrote:
Wed Jan 22, 2020 2:54 am
retiringwhen wrote:
Tue Jan 21, 2020 3:57 pm
Line 12 comes from 1040 line 3a as far as I can tell. (this seems odd and possibly even incorrect, not sure based on the names of the entries. it could also be my example which has a net capital loss for the year)
Looking at the draft instructions, line 12 is poorly named. It appears to be the amount of income that is taxed at 0%/15%/20% rates. If there was a capital loss, then of course only qualified dividends (i.e. line 3a) would be taxed at those rates.
that makes sense.

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Re: Total Stock Market Index - Section 199A dividends this year

Post by taurabora » Wed Jan 22, 2020 8:48 am

So, are these taxed at a 20% rate? And formerly they would have been taxed at marginal tax rate?

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Re: Total Stock Market Index - Section 199A dividends this year

Post by Retired1809 » Wed Jan 22, 2020 9:07 am

Would there be a problem with just waiting until my TurboTax program can simply download all of my tax forms (e.g., 1099's) from my various brokers? My household owns the TSM in both the Admiral class as well as ETF class.

I'm not surprised that not all of the TSM dividends aren't "qualified." But I'm still scratching my head a little about why, in some recent years, 100% of its dividends were qualified. Were the REITs not paying dividends in those years?

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Re: Total Stock Market Index - Section 199A dividends this year

Post by cas » Wed Jan 22, 2020 9:40 am

taurabora wrote:
Wed Jan 22, 2020 8:48 am
So, are these taxed at a 20% rate? And formerly they would have been taxed at marginal tax rate?
No and maybe(?).
  • No: not a flat 20% tax rate. A 20% deduction.

    My current understanding is that if you meet certain income constraints (which involve both amount and type of income) , you get to deduct 20% of your QBI from your Taxable Income before you calculate your taxes. (Based only on my brief squinting at the form/instructions, these income constraints look much more modest/simpler for 199A dividends than for other sorts of Qualified Business Income (QBI). But I could be wrong.)

    If my understanding is correct, this means that you can also think of it as your 199A dividends being taxed at 80% of your marginal tax rate for ordinary income (0.8 x marginal tax rate for ordinary income).

    In the end, the difference in taxes due to taking a QBI deduction for 199A dividends from broad index funds is going to be pretty minimal.

    The good news is that a reduction in taxes is a reduction in taxes, even if the reduction is minimal. The bad news is that it is another tax form added to your return and that some sorts of QBI can be really complex to understand. Fortunately ... I think ... maybe ... my initial take is that the 199A-dividend-from-mutual-fund type of QBI is much simpler to deal with than other sorts of QBI. It should make tax preparers who charge by the form happy, though.
  • Maybe:

    Yes, in the case of Total Stock Market Index Fund (which had less than 95% qualified dividends), formerly they would have been taxed as "non-qualified dividends" at the marginal tax rate for ordinary income.

    However, I think some of the posts above raise a question whether the old rule that "if a mutual fund has at least 95% qualified dividends, it gets to report 100% qualified dividends on the 1099-DIV" has been superseded by a new regulation that says that 199A dividends have to be separately reported as such, even if the fund has at least 95% qualified dividends. This possible new regulation (??? complete speculation on my part, except that Professor Google mentioned a proposed regulation existing this time last year) would appear to be affecting the Large Cap Index fund that people mentioned above, which would have reported 100% qualified dividends under the old regulation, but appears not to be doing so this year. Last year, these people paid qualified dividend tax rates on these dividends. This year they are paying 80% of ordinary income marginal rate. Maybe. I'm going off the anecdotal information reported above plus adding huge dose of my own speculation. I could be way wrong.

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Re: Total Stock Market Index - Section 199A dividends this year

Post by rkhusky » Wed Jan 22, 2020 10:21 am

The 199 dividend deduction is saving me at the 27% marginal rate, but it turns out to be only worth $8 in tax savings. Form 8995 for just this is not too bad.

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Re: Total Stock Market Index - Section 199A dividends this year

Post by Random Poster » Wed Jan 22, 2020 10:41 am

I can't find any finalized IRS instructions for forms 8995 or 8995-A, but this Section 199A dividends and QBI deduction seems to be ungodly complex, particularly when one only has such Section 199A dividends from one's holding in Vanguard's Total Stock Market Index fund and still figures their taxes by hand.

Although the number shown in Box 5 of my 1099-DIV for Section 199A dividends is in the $1600 range, I'm strongly considering just ignoring it and giving up whatever deduction may exist. For someone whose income is too high to use the simplified Form 8995, I'm not sure that I see the benefit of a possible $320 deduction if it is going to take a day's worth of reading and calculating to get it.

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Re: Total Stock Market Index - Section 199A dividends this year

Post by Random Poster » Wed Jan 22, 2020 11:17 am

House Blend wrote:
Tue Jan 21, 2020 3:03 pm
After a spending a few minutes digging at the IRS, it looks like 95% of (the draft of) the instructions for Form 8995 are irrelevant for a TSM investor. It may take a while to figure out which 5% are relevant.
In the draft instructions I've seen, there is only one reference to a regulated investment company (RIC), but I didn't see any directions to how one references a RIC on any of the 8995 forms or schedules.

Am I missing something?

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Re: Total Stock Market Index - Section 199A dividends this year

Post by rkhusky » Wed Jan 22, 2020 2:05 pm

Random Poster wrote:
Wed Jan 22, 2020 11:17 am
In the draft instructions I've seen, there is only one reference to a regulated investment company (RIC), but I didn't see any directions to how one references a RIC on any of the 8995 forms or schedules.

Am I missing something?

Instructions for 8995 say
Qualified REIT dividends include any dividends you received from a REIT held for more than 45 days and for which the payment isn’t obligated to someone else and that isn’t a capital gain dividend or qualified dividend, plus, your qualified REIT dividends received from a regulated investment company (RIC). This amount is reported to you on Form 1099-DIV, line 5.
Line 6 of form 8995 is titled:
Qualified REIT dividends and publicly traded partnership (PTP) income or (loss)
My 1099-DIV from Vanguard has entries for box 5, which I assume is the same as line 5 from the 8995 instructions, and should therefore be entered on 8995 line 6.

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Re: Total Stock Market Index - Section 199A dividends this year

Post by House Blend » Wed Jan 22, 2020 2:36 pm

Random Poster wrote:
Wed Jan 22, 2020 11:17 am
House Blend wrote:
Tue Jan 21, 2020 3:03 pm
After a spending a few minutes digging at the IRS, it looks like 95% of (the draft of) the instructions for Form 8995 are irrelevant for a TSM investor. It may take a while to figure out which 5% are relevant.
In the draft instructions I've seen, there is only one reference to a regulated investment company (RIC), but I didn't see any directions to how one references a RIC on any of the 8995 forms or schedules.
I haven't had a chance yet to spend much quality time with Form 8995, but this is presumably the paragraph in question.
The IRS wrote:Qualified REIT dividends include any dividends you received from a REIT held for more than 45 days and for which the payment isn’t obligated to someone else and that isn’t a capital gain dividend or qualified dividend, plus, your qualified REIT dividends received from a regulated investment company (RIC). This amount is reported to you on Form 1099-DIV, line 5.
I think "line 5" may be a typo (should be "box 5"?), but between that and retiringwhen's report on what turbotax did, it seems reasonably clear to me: you would report what's in Box 5 on line 6 of Form 8995 whether your 1099 was issued by an REIT or an RIC. ( And let's not get too worked up about the ridiculous choice of terminology requiring a "qualified REIT dividend" to not be a "qualified dividend". Only a bureaucrat would come up with that.)

It also occurred to me look at the instructions for recipients of the 1099-DIV. The fine print at the bottom inspired me to look at the instructions for those issuing Forms 1099-DIV. Here are the versions for 2020 and 2019:
https://www.irs.gov/pub/irs-prior/i1099div--2020.pdf
https://www.irs.gov/pub/irs-prior/i1099div--2019.pdf

Note that the 2019 version (presumably for 2018 tax filers) has a "What's New" section, but the 2020 version does not. However, and curiously, this paragraph in the 2020 version does not exist in the 2019 version:
The IRS wrote:Qualified REIT dividends. Certain taxpayers are entitled to a deduction under section 199A computed by reference to several types of income, including qualified REIT dividends. A qualified REIT dividend generally is a dividend from a REIT received during the tax year that is not a capital gain dividend or a qualified dividend. However, a qualified REIT dividend does not include any REIT dividend received with respect to any share of REIT stock that is held for 45 days or less during the 91-day period beginning on the date that is 45 days before the date on which such share became ex-dividend with respect to the dividend. When counting the number of days the recipient held the stock, include the day the recipient disposed of the stock, but do not include the day the recipient acquired the stock or certain days during which the recipient's risk of loss was diminished. In addition, a qualified REIT dividend does not include any dividend on shares of REIT stock to the extent the recipient is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.
It doesn't explicitly mention passing through to RICs, but this new language suggests that either there is new law or a new understanding of the law that has led to non-qualified dividends from REITs being eligible for QBI treatment.

It will be interesting to hear if funds from providers other than Vanguard will be reporting Sec 199A income.

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Re: Total Stock Market Index - Section 199A dividends this year

Post by Random Poster » Wed Jan 22, 2020 2:40 pm

rkhusky wrote:
Wed Jan 22, 2020 2:05 pm
Random Poster wrote:
Wed Jan 22, 2020 11:17 am
In the draft instructions I've seen, there is only one reference to a regulated investment company (RIC), but I didn't see any directions to how one references a RIC on any of the 8995 forms or schedules.

Am I missing something?

Instructions for 8995 say
Qualified REIT dividends include any dividends you received from a REIT held for more than 45 days and for which the payment isn’t obligated to someone else and that isn’t a capital gain dividend or qualified dividend, plus, your qualified REIT dividends received from a regulated investment company (RIC). This amount is reported to you on Form 1099-DIV, line 5.
Line 6 of form 8995 is titled:
Qualified REIT dividends and publicly traded partnership (PTP) income or (loss)
My 1099-DIV from Vanguard has entries for box 5, which I assume is the same as line 5 from the 8995 instructions, and should therefore be entered on 8995 line 6.
Thanks, that is helpful.

Although what are you supposed to put in Line 1 of Form 8995? Just leave it blank?

And Form 8995-A (for the slightly higher earners) is just a wee bit more complicated, particularly Part II of that form.

Wading through the instructions is not going to be a fun experience, I'm afraid.

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Re: Total Stock Market Index - Section 199A dividends this year

Post by rkhusky » Wed Jan 22, 2020 2:47 pm

Random Poster wrote:
Wed Jan 22, 2020 2:40 pm
Although what are you supposed to put in Line 1 of Form 8995? Just leave it blank?

And Form 8995-A (for the slightly higher earners) is just a wee bit more complicated, particularly Part II of that form.

Wading through the instructions is not going to be a fun experience, I'm afraid.
I assume that lines 1-5 of 8995 are for if you have your own business.

My income lets me use 8995, so I didn't intend to read through 8995A (not even for fun).

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Re: Total Stock Market Index - Section 199A dividends this year

Post by Random Poster » Wed Jan 22, 2020 2:59 pm

rkhusky wrote:
Wed Jan 22, 2020 2:47 pm
Random Poster wrote:
Wed Jan 22, 2020 2:40 pm
Although what are you supposed to put in Line 1 of Form 8995? Just leave it blank?

And Form 8995-A (for the slightly higher earners) is just a wee bit more complicated, particularly Part II of that form.

Wading through the instructions is not going to be a fun experience, I'm afraid.
I assume that lines 1-5 of 8995 are for if you have your own business.

My income lets me use 8995, so I didn't intend to read through 8995A (not even for fun).
Eyeballing the differences between 8995 and 8995-A, I'm thinking that you are correct and that, for people who only have Section 199A dividends from a 1099-DIV and who complete Form 8995-A, Parts I, II, and possibly even III (effectively, since it feeds into Part I) of that form may end up being blank or just filled in with zeros.

Part IV of Form 8995-A is pretty similar to Lines 2 through 17 of Form 8995.

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Re: Total Stock Market Index - Section 199A dividends this year

Post by boomer_techie » Wed Jan 22, 2020 5:20 pm

rkhusky wrote:
Wed Jan 22, 2020 2:47 pm
My income lets me use 8995, so I didn't intend to read through 8995A (not even for fun).
Random Poster wrote:
Wed Jan 22, 2020 2:59 pm
Eyeballing the differences between 8995 and 8995-A, I'm thinking that you are correct and that, for people who only have Section 199A dividends from a 1099-DIV and who complete Form 8995-A, Parts I, II, and possibly even III (effectively, since it feeds into Part I) of that form may end up being blank or just filled in with zeros.

Part IV of Form 8995-A is pretty similar to Lines 2 through 17 of Form 8995.
I'm seeing the same as Random Poster: Someone who wouldn't have anything in line 1 of 8995, also won't have anything in Parts I, II, and III of 8995A. And then, because the income threshold and phaseout numbers only apply in Parts II and III, I see no reason for that person to file 8995A instead of 8995, no matter their income.

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Re: Total Stock Market Index - Section 199A dividends this year

Post by Random Poster » Wed Jan 22, 2020 5:42 pm

boomer_techie wrote:
Wed Jan 22, 2020 5:20 pm
I'm seeing the same as Random Poster: Someone who wouldn't have anything in line 1 of 8995, also won't have anything in Parts I, II, and III of 8995A. And then, because the income threshold and phaseout numbers only apply in Parts II and III, I see no reason for that person to file 8995A instead of 8995, no matter their income.
Well, yes, other than the fact that draft instructions for Form 8995-A state that:
Individuals and eligible estates and trusts use Form 8995-A to figure the QBI deduction if:
• You have QBI, qualified REIT dividends, or qualified PTP income or loss; and
• Your 2019 taxable income before your QBI deduction is more than $160,700 ($160,725 if married filing separately or a
married nonresident alien; $321,400 if married filing jointly); or
• You’re a patron in a specified agricultural or horticultural cooperative.

Otherwise use Form 8995, Qualified Business Income Deduction Simplified Computation, to figure your QBI deduction.


Maybe the finalized and published instructions will state something differently regarding the use of which form if qualified REIT dividends (or Section 199A dividends---are these the same thing?) from a 1099-DIV is the only reason you are completing the form, but if not, I think it would be prudent to go with Form 8995-A if one's income is in the specified range.

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Re: Total Stock Market Index - Section 199A dividends this year

Post by prd1982 » Wed Jan 22, 2020 5:53 pm

House Blend wrote:
Wed Jan 22, 2020 2:36 pm
It will be interesting to hear if funds from providers other than Vanguard will be reporting Sec 199A income.
I got a 1099 for the TR Price Balanced Fund, and it included a value in Box 5. H&R Block doesn't have the final forms for this yet to see what happens.

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Re: Total Stock Market Index - Section 199A dividends this year

Post by Grogs » Wed Jan 22, 2020 6:13 pm

House Blend wrote:
Tue Jan 21, 2020 4:00 pm
^Thanks!
JDDS wrote:
Tue Jan 21, 2020 3:29 pm
Large cap index is showing about 2.84%
FWIW, I think it is exactly 2.85% of the dividend (to the nearest penny), and 5.85% in the case of Total Stock.

Overall, for funds with a small percentage of REIT income, this amounts to a PITA. More tax complexity for a tiny benefit.

In the specific case of Large Cap Index, the decision (assuming Vanguard had a choice in the matter) to report 199A dividends is not even a tiny benefit. It's a tiny additional tax increase.

In the olden days (i.e., last year), the 97.15% of qualified dividends paid by this fund, since it is above 95%, would have been rounded up to 100%. This year, there was no rounding and one gets at best 20% off ones usual marginal rate on the 2.85% non-qualified dividends.
I want to make sure I understand how this works. Say I received $1,000 in dividends for Total Stock Market (VTSAX)

- 5.85%, or $58.50 will be unqualified/Section 199A

- For a 24% marginal tax rate, a 20% reduction is 4.8%

- Total tax is reduced by $58.50 X .048 = $2.81

When I get a chance, I'll plug these into H&R Block and see if the change matches those numbers.

rkhusky
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Re: Total Stock Market Index - Section 199A dividends this year

Post by rkhusky » Wed Jan 22, 2020 9:39 pm

Random Poster wrote:
Wed Jan 22, 2020 5:42 pm
• Your 2019 taxable income before your QBI deduction is more than $160,700 ($160,725 if married filing separately or a
married nonresident alien; $321,400 if married filing jointly); or
These numbers seem a little odd. Probably a work in progress. 2019 24% tax bracket upper boundaries are $160,725 single, $160,700 head of household, $321,450 MFJ, $160,725 MFS)

TheDDC
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Re: Total Stock Market Index - Section 199A dividends this year

Post by TheDDC » Wed Jan 22, 2020 10:08 pm

This seems ridiculous to me. I don't invest in VTSAX to get involved in REITs. If I wanted to do so I would have bought VGSIX. Anyone else hacked off about this?

-TheDDC
Refreshingly, a double barrel shotgun blast of truth... | Rules to wealth building: 100% VTSAX piled high and deep, 0% given away to banks, minimize amount given to health care industrial complex

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House Blend
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Re: Total Stock Market Index - Section 199A dividends this year

Post by House Blend » Wed Jan 22, 2020 10:11 pm

Grogs wrote:
Wed Jan 22, 2020 6:13 pm
House Blend wrote:
Tue Jan 21, 2020 4:00 pm
JDDS wrote:
Tue Jan 21, 2020 3:29 pm
Large cap index is showing about 2.84%
FWIW, I think it is exactly 2.85% of the dividend (to the nearest penny), and 5.85% in the case of Total Stock.

Overall, for funds with a small percentage of REIT income, this amounts to a PITA. More tax complexity for a tiny benefit.

In the specific case of Large Cap Index, the decision (assuming Vanguard had a choice in the matter) to report 199A dividends is not even a tiny benefit. It's a tiny additional tax increase.

In the olden days (i.e., last year), the 97.15% of qualified dividends paid by this fund, since it is above 95%, would have been rounded up to 100%. This year, there was no rounding and one gets at best 20% off ones usual marginal rate on the 2.85% non-qualified dividends.
I want to make sure I understand how this works. Say I received $1,000 in dividends for Total Stock Market (VTSAX)

- 5.85%, or $58.50 will be unqualified/Section 199A

- For a 24% marginal tax rate, a 20% reduction is 4.8%

- Total tax is reduced by $58.50 X .048 = $2.81

When I get a chance, I'll plug these into H&R Block and see if the change matches those numbers.
That looks right, although your software will presumably round to dollars.

A peculiar thing about this deduction is that it falls into a Twilight Zone on the 1040. It is not an Adjustment to Income and is not part of Schedule A. In fact it is the only item other than your standard or Schedule A deduction that gets subtracted from AGI when computing Taxable Income.

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House Blend
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Re: Total Stock Market Index - Section 199A dividends this year

Post by House Blend » Wed Jan 22, 2020 10:35 pm

TheDDC wrote:
Wed Jan 22, 2020 10:08 pm
This seems ridiculous to me. I don't invest in VTSAX to get involved in REITs. If I wanted to do so I would have bought VGSIX.
The ex-US stock funds will have no Sec 199A income to report.

So pick your poison: ex-US and Form 1116, or US and Form 8995. :twisted:

Another option, less poisonous: the 500 Index has no Sec 199A income to report. (See the spreadsheet mentioned upthread.)

retiringwhen
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Re: Total Stock Market Index - Section 199A dividends this year

Post by retiringwhen » Wed Jan 22, 2020 11:09 pm

TheDDC wrote:
Wed Jan 22, 2020 10:08 pm
This seems ridiculous to me. I don't invest in VTSAX to get involved in REITs. If I wanted to do so I would have bought VGSIX. Anyone else hacked off about this?

-TheDDC
They've always been there, it is just that the tax treatment has changed.

rkhusky
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Re: Total Stock Market Index - Section 199A dividends this year

Post by rkhusky » Thu Jan 23, 2020 8:32 am

TheDDC wrote:
Wed Jan 22, 2020 10:08 pm
This seems ridiculous to me. I don't invest in VTSAX to get involved in REITs. If I wanted to do so I would have bought VGSIX. Anyone else hacked off about this?

-TheDDC
REIT's are stocks. And some are from the US. VTSAX is the Total Stock Market (total US stock market that is).

DrCheese
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Re: Total Stock Market Index - Section 199A dividends this year

Post by DrCheese » Thu Jan 23, 2020 3:04 pm

[/quote]
Can you post a screenscrape of how turbotax filled out Form 8995? Use fictitious numbers if you prefer.

[/quote]

Here are step by step directions.

On form 8995

Line 6, place Section 199a dividends from 1099-Div box 5 (in attached example, I had $5,000 in Section 199a dividends in Box 5)
Line 7, carryover from last year (should be 0)
Line 8, Line 6 plus line 7
Line 9 Multiple line 8 * .20
Line 10 Add line 5 + 9 (line 5 should be zero so you are just copying line 9)
Line 11 This is line 8b from 1040 (adjusted gross income $68,000) - line 9 from 1040 (standard deduction or deduction from Schedule A $12,200)
Line 12 Total of Capital Gains from Schedule D
Line 13 Subtract line 12 from line 11
Line 14 Multiple line 13 * .2 (this is your maximum Qualified Business Income Deduction)
Line 15 Enter the lessor of Line 10 or 14 (this is just the actual Qualified Business Income Deduction or the maximum Qualified Business Income Deduction whichever is lower)

That is it for form 8995.

On Form 1040, Put line 15 from form 8995 on line 10

Image Image

UpperNwGuy
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Re: Total Stock Market Index - Section 199A dividends this year

Post by UpperNwGuy » Thu Jan 23, 2020 3:15 pm

TheDDC wrote:
Wed Jan 22, 2020 10:08 pm
This seems ridiculous to me. I don't invest in VTSAX to get involved in REITs. If I wanted to do so I would have bought VGSIX. Anyone else hacked off about this?

-TheDDC
VFIAX is suddenly starting look better than VTSAX.

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White Coat Investor
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Re: Total Stock Market Index - Section 199A dividends this year

Post by White Coat Investor » Thu Jan 23, 2020 3:24 pm

Yay! My favorite tax deduction and my favorite mutual fund just got together! Could be close to a $1,000 deduction for me and should only get better in coming years.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Total Stock Market Index - Section 199A dividends this year

Post by White Coat Investor » Thu Jan 23, 2020 3:25 pm

rkhusky wrote:
Thu Jan 23, 2020 8:32 am
TheDDC wrote:
Wed Jan 22, 2020 10:08 pm
This seems ridiculous to me. I don't invest in VTSAX to get involved in REITs. If I wanted to do so I would have bought VGSIX. Anyone else hacked off about this?

-TheDDC
REIT's are stocks. And some are from the US. VTSAX is the Total Stock Market (total US stock market that is).
Sssshhh....he might find out he owns some small value stocks too.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

S_Track
Posts: 328
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Re: Total Stock Market Index - Section 199A dividends this year

Post by S_Track » Thu Jan 23, 2020 5:29 pm

House Blend wrote:
Wed Jan 22, 2020 10:11 pm
Grogs wrote:
Wed Jan 22, 2020 6:13 pm
House Blend wrote:
Tue Jan 21, 2020 4:00 pm
JDDS wrote:
Tue Jan 21, 2020 3:29 pm
Large cap index is showing about 2.84%
FWIW, I think it is exactly 2.85% of the dividend (to the nearest penny), and 5.85% in the case of Total Stock.

Overall, for funds with a small percentage of REIT income, this amounts to a PITA. More tax complexity for a tiny benefit.

In the specific case of Large Cap Index, the decision (assuming Vanguard had a choice in the matter) to report 199A dividends is not even a tiny benefit. It's a tiny additional tax increase.

In the olden days (i.e., last year), the 97.15% of qualified dividends paid by this fund, since it is above 95%, would have been rounded up to 100%. This year, there was no rounding and one gets at best 20% off ones usual marginal rate on the 2.85% non-qualified dividends.
I want to make sure I understand how this works. Say I received $1,000 in dividends for Total Stock Market (VTSAX)

- 5.85%, or $58.50 will be unqualified/Section 199A

- For a 24% marginal tax rate, a 20% reduction is 4.8%

- Total tax is reduced by $58.50 X .048 = $2.81

When I get a chance, I'll plug these into H&R Block and see if the change matches those numbers.
That looks right, although your software will presumably round to dollars.

A peculiar thing about this deduction is that it falls into a Twilight Zone on the 1040. It is not an Adjustment to Income and is not part of Schedule A. In fact it is the only item other than your standard or Schedule A deduction that gets subtracted from AGI when computing Taxable Income.
Thanks for pointing this out. Two questions, why are folks upset about this, isn't a deduction (even outside of Schedule A) a good thing? 2) Since this is a deduction, what happens if you ignore it? Does the IRS get upset when you don't take all your deductions?

retiringwhen
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Re: Total Stock Market Index - Section 199A dividends this year

Post by retiringwhen » Thu Jan 23, 2020 5:38 pm

S_Track wrote:
Thu Jan 23, 2020 5:29 pm
Two questions, why are folks upset about this, isn't a deduction (even outside of Schedule A) a good thing? 2) Since this is a deduction, what happens if you ignore it? Does the IRS get upset when you don't take all your deductions?
1.) i don't know why folks are upset, it does improve the tax efficiency of some funds a tiny bit.

I will say this is another non-trivial addition to tax complexity though. The average investor will now have to track USGO interest payments, Qualified Dividends, Short and Long-term Capital Gains, tax-cost/basis & tax-loss carryover, Foreign Taxes paid and Section 199A (aka REIT) qualified business income all just for the 3-fund portfolio.

The law is ripe for some simplification again. We are along way from the Tax Reform act of 1986.

2.) It will be hard to ignore as the values are now reported on the 1099-DIV, but I guess you could just ignore it, i am pretty sure the IRS will not complain. If you are using TurboTax, it does all the work for you if you import or type in the values on the 1099-DIV, Not really complex at all.

Grogs
Posts: 604
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Re: Total Stock Market Index - Section 199A dividends this year

Post by Grogs » Thu Jan 23, 2020 6:24 pm

S_Track wrote:
Thu Jan 23, 2020 5:29 pm
House Blend wrote:
Wed Jan 22, 2020 10:11 pm
Grogs wrote:
Wed Jan 22, 2020 6:13 pm
House Blend wrote:
Tue Jan 21, 2020 4:00 pm
JDDS wrote:
Tue Jan 21, 2020 3:29 pm
Large cap index is showing about 2.84%
FWIW, I think it is exactly 2.85% of the dividend (to the nearest penny), and 5.85% in the case of Total Stock.

Overall, for funds with a small percentage of REIT income, this amounts to a PITA. More tax complexity for a tiny benefit.

In the specific case of Large Cap Index, the decision (assuming Vanguard had a choice in the matter) to report 199A dividends is not even a tiny benefit. It's a tiny additional tax increase.

In the olden days (i.e., last year), the 97.15% of qualified dividends paid by this fund, since it is above 95%, would have been rounded up to 100%. This year, there was no rounding and one gets at best 20% off ones usual marginal rate on the 2.85% non-qualified dividends.
I want to make sure I understand how this works. Say I received $1,000 in dividends for Total Stock Market (VTSAX)

- 5.85%, or $58.50 will be unqualified/Section 199A

- For a 24% marginal tax rate, a 20% reduction is 4.8%

- Total tax is reduced by $58.50 X .048 = $2.81

When I get a chance, I'll plug these into H&R Block and see if the change matches those numbers.
That looks right, although your software will presumably round to dollars.

A peculiar thing about this deduction is that it falls into a Twilight Zone on the 1040. It is not an Adjustment to Income and is not part of Schedule A. In fact it is the only item other than your standard or Schedule A deduction that gets subtracted from AGI when computing Taxable Income.
Thanks for pointing this out. Two questions, why are folks upset about this, isn't a deduction (even outside of Schedule A) a good thing? 2) Since this is a deduction, what happens if you ignore it? Does the IRS get upset when you don't take all your deductions?
I think the problem is for funds with 95-100% qualified dividends. In the past, anything greater than 95% would get rounded to 100%. Now, (apparently) they have to report the non-qualified as Sec. 199A. So instead of paying the 15/20% QD rate they have to pay 80% of their marginal rate, which is worse. For other funds like VTSAX that have less than 95% qualified dividends, it is indeed an improvement over paying the full marginal rate.

As for a deduction, I believe you are required to report everything accurately. That said, if the IRS audited you and found they owed you money I can't imagine they would put you in jail if you refused to take it. :greedy

FactualFran
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Re: Total Stock Market Index - Section 199A dividends this year

Post by FactualFran » Thu Jan 23, 2020 7:06 pm

Grogs wrote:
Thu Jan 23, 2020 6:24 pm
I think the problem is for funds with 95-100% qualified dividends. In the past, anything greater than 95% would get rounded to 100%. Now, (apparently) they have to report the non-qualified as Sec. 199A. So instead of paying the 15/20% QD rate they have to pay 80% of their marginal rate, which is worse. For other funds like VTSAX that have less than 95% qualified dividends, it is indeed an improvement over paying the full marginal rate.
Sec. 199A dividends should have no effect on what percentage of the total dividend amount is qualified. The non-qualified dividends include the Sec. 199A dividends. The reporting of the Sec. 199A dividends allows one to have that income taxed differently than ordinary income, similarly to how reporting of the qualified dividends allows one to take to that that income taxed differently than ordinary income.

rkhusky
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Re: Total Stock Market Index - Section 199A dividends this year

Post by rkhusky » Fri Jan 24, 2020 8:02 am

You can find the 2019 form 8995 and instructions here:
https://apps.irs.gov/app/picklist/list/ ... earch=Find
Last edited by rkhusky on Fri Jan 24, 2020 9:32 am, edited 1 time in total.

retiringwhen
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Re: Total Stock Market Index - Section 199A dividends this year

Post by retiringwhen » Fri Jan 24, 2020 8:52 am

House Blend wrote:
Tue Jan 21, 2020 4:15 pm
For tax geeks who own Vanguard funds in a brokerage account and haven't seen their 1099's yet, you can reverse engineer your numbers by downloading this spreadsheet:
https://advisors.vanguard.com/VGApp/iip ... e=iciFiles

This reports all of the 2019 distribution details for all Vanguard funds, including the breakdown of qualified vs. non-qualified dividends, foreign taxes paid, and (ugh) Section 199A income.
House Blend or anyone, do you know where the ICI file is stored for years before 2019? I think I have a pretty slick way to automate an analysis of tax-efficiency over time using that dataset (reasonably well formatted for spreadsheet manipulation.)

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Re: Total Stock Market Index - Section 199A dividends this year

Post by cadreamer2015 » Fri Jan 24, 2020 11:09 am

I hold the Vanguard Total Stock Market Index Admiral fund in an irrevocable trust of which I'm the beneficiary. Dividend income from the trust flows to me and is reported on a K-1. I don't see any place on the current K-1 (the final K-1 form won't be ready until 1/31 according to TurboTax). Will there be a place for the 199a QBI dividends to flow via the K-1 from the trust to my 1040?
De gustibus non est disputandum

retiringwhen
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Re: Total Stock Market Index - Section 199A dividends this year

Post by retiringwhen » Fri Jan 24, 2020 12:35 pm

cadreamer2015 wrote:
Fri Jan 24, 2020 11:09 am
I hold the Vanguard Total Stock Market Index Admiral fund in an irrevocable trust of which I'm the beneficiary. Dividend income from the trust flows to me and is reported on a K-1. I don't see any place on the current K-1 (the final K-1 form won't be ready until 1/31 according to TurboTax). Will there be a place for the 199a QBI dividends to flow via the K-1 from the trust to my 1040?
2018 Form, you used Line 20, Code Z = Section 199A - QBI Income

Grogs
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Re: Total Stock Market Index - Section 199A dividends this year

Post by Grogs » Fri Jan 24, 2020 4:08 pm

FactualFran wrote:
Thu Jan 23, 2020 7:06 pm
Grogs wrote:
Thu Jan 23, 2020 6:24 pm
I think the problem is for funds with 95-100% qualified dividends. In the past, anything greater than 95% would get rounded to 100%. Now, (apparently) they have to report the non-qualified as Sec. 199A. So instead of paying the 15/20% QD rate they have to pay 80% of their marginal rate, which is worse. For other funds like VTSAX that have less than 95% qualified dividends, it is indeed an improvement over paying the full marginal rate.
Sec. 199A dividends should have no effect on what percentage of the total dividend amount is qualified. The non-qualified dividends include the Sec. 199A dividends. The reporting of the Sec. 199A dividends allows one to have that income taxed differently than ordinary income, similarly to how reporting of the qualified dividends allows one to take to that that income taxed differently than ordinary income.
I didn't say it affected the actual percentage of qualified dividends. What I said was that in the past, greater than 95% qualified dividends was reported as 100%. Now that's not happening, at least according to this earlier post below.
House Blend wrote:
Tue Jan 21, 2020 4:00 pm
^Thanks!
JDDS wrote:
Tue Jan 21, 2020 3:29 pm
Large cap index is showing about 2.84%
FWIW, I think it is exactly 2.85% of the dividend (to the nearest penny), and 5.85% in the case of Total Stock.

Overall, for funds with a small percentage of REIT income, this amounts to a PITA. More tax complexity for a tiny benefit.

In the specific case of Large Cap Index, the decision (assuming Vanguard had a choice in the matter) to report 199A dividends is not even a tiny benefit. It's a tiny additional tax increase.

In the olden days (i.e., last year), the 97.15% of qualified dividends paid by this fund, since it is above 95%, would have been rounded up to 100%. This year, there was no rounding and one gets at best 20% off ones usual marginal rate on the 2.85% non-qualified dividends.

dkturner
Posts: 1563
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Re: Total Stock Market Index - Section 199A dividends this year

Post by dkturner » Fri Jan 24, 2020 4:32 pm

Grogs wrote:
Fri Jan 24, 2020 4:08 pm
FactualFran wrote:
Thu Jan 23, 2020 7:06 pm
Grogs wrote:
Thu Jan 23, 2020 6:24 pm
I think the problem is for funds with 95-100% qualified dividends. In the past, anything greater than 95% would get rounded to 100%. Now, (apparently) they have to report the non-qualified as Sec. 199A. So instead of paying the 15/20% QD rate they have to pay 80% of their marginal rate, which is worse. For other funds like VTSAX that have less than 95% qualified dividends, it is indeed an improvement over paying the full marginal rate.
Sec. 199A dividends should have no effect on what percentage of the total dividend amount is qualified. The non-qualified dividends include the Sec. 199A dividends. The reporting of the Sec. 199A dividends allows one to have that income taxed differently than ordinary income, similarly to how reporting of the qualified dividends allows one to take to that that income taxed differently than ordinary income.
I didn't say it affected the actual percentage of qualified dividends. What I said was that in the past, greater than 95% qualified dividends was reported as 100%. Now that's not happening, at least according to this earlier post below.
House Blend wrote:
Tue Jan 21, 2020 4:00 pm
^Thanks!
JDDS wrote:
Tue Jan 21, 2020 3:29 pm
Large cap index is showing about 2.84%
FWIW, I think it is exactly 2.85% of the dividend (to the nearest penny), and 5.85% in the case of Total Stock.

Overall, for funds with a small percentage of REIT income, this amounts to a PITA. More tax complexity for a tiny benefit.

In the specific case of Large Cap Index, the decision (assuming Vanguard had a choice in the matter) to report 199A dividends is not even a tiny benefit. It's a tiny additional tax increase.

In the olden days (i.e., last year), the 97.15% of qualified dividends paid by this fund, since it is above 95%, would have been rounded up to 100%. This year, there was no rounding and one gets at best 20% off ones usual marginal rate on the 2.85% non-qualified dividends.
Unless I’m missing something here the 199A dividends come from REITS - and REIT dividends have never been qualified dividends. In 1998 (check your 1998 1099DIV forms) there was no such thing as 199A dividends AND the Vanguard Total Stock Market Index Fund still did not have 100% of its dividends qualified.

199A dividends simply give taxpayers an additional tax deduction. They don’t have any effect on the amount of qualified dividends a fund reports.

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