Qualified Versus Unqualified Dividends

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TargetingFI
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Joined: Sat Mar 10, 2018 1:00 pm

Qualified Versus Unqualified Dividends

Post by TargetingFI »

I have been investing in VTSAX and VTIAX for over a decade. Looking at my 2020 tax return, I was surprised to see those two funds produced more ordinary than qualified dividends, which, of course, means more taxes for me. I'd say approximately 55-60% were ordinary dividends.

As these are index funds, and don't commonly buy/sell new new positions like actively managed funds, why are the majority of dividends ordinary?
Makefile
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Re: Qualified Versus Unqualified Dividends

Post by Makefile »

Qualified dividends are a subset of ordinary dividends, not in addition to them, so to find non-qualified dividends you have to subtract box 1b from 1a.
dukeblue219
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Re: Qualified Versus Unqualified Dividends

Post by dukeblue219 »

Take a look at https://advisors.vanguard.com/tax-cente ... end-income

You can search for VTSAX to confirm it is mostly or entirely qualified each year. It's a common misconception that the ordinary amount on a 1099 implies "not qualified" when in fact it does not. The terms are, admittedly, a bit confusing.
JustinR
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Re: Qualified Versus Unqualified Dividends

Post by JustinR »

TargetingFI wrote: Sun May 02, 2021 10:02 pm I have been investing in VTSAX and VTIAX for over a decade. Looking at my 2020 tax return, I was surprised to see those two funds produced more ordinary than qualified dividends, which, of course, means more taxes for me. I'd say approximately 55-60% were ordinary dividends.

As these are index funds, and don't commonly buy/sell new new positions like actively managed funds, why are the majority of dividends ordinary?
Box 1a "Total Ordinary Dividends" is actually "Total Dividends"

To find the amount of non-qualified dividends, you subtract 1a - 1b
livesoft
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Re: Qualified Versus Unqualified Dividends

Post by livesoft »

TargetingFI wrote: Sun May 02, 2021 10:02 pm I have been investing in VTSAX and VTIAX for over a decade. ....
Ordinary dividends are BOTH qualified and non-qualified. Or if you like, there are qualified ordinary dividends and non-qualified ordinary dividends.

Tax-exempt dividends are not ordinary dividends. They are exempt interest dividends. You did not mention this kind of dividend.

It may be time to read IRS Publication 550. In the meantime Vanguard has a brochure that helps explain a 1099-DIV:
https://personal.vanguard.com/pdf/1099DIV_012020.pdf

You should probably also review your past 10 years of tax returns since you have been investing in these funds for so long.
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wandering_aimlessly
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Re: Qualified Versus Unqualified Dividends

Post by wandering_aimlessly »

The confusion is understandable...I love that even the IRS says this in the 1099-DIV section of topic 404:

"Dividends can be classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates."

https://www.irs.gov/taxtopics/tc404

And they wonder why we get confused????
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dodecahedron
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Re: Qualified Versus Unqualified Dividends

Post by dodecahedron »

Out of curiosity, I pulled out my 2020 1099-DIV for VTSAX and did some calculations.

89% of VTSAX dividends were "qualified"

8% of VTSAX dividends were not qualified but were REIT Section 199A dividends (reported on line 5 of the 1099-DIV), so they were subject to taxation at ordinary income tax rates BUT also eligible for the 20% QBI deduction, lowering the effective tax rate.

Only 3% of VTSAX dividends were neither qualified NOR eligible for Section 199A treatment.

In my case, since my federal ordinary income tax rate is 12% and my LTCG/qual div rate is 0%, my Federal effective tax rate on VTSAX income is

(.89)*(0) + (.08)*(.12)*(.08) + (.03)*(.12) = 0.004368, i.e., less than one half of one percent.

Edited to correct:

(.89)*(0) + (.08)*(.12)*(.8) + (.03)*(.12) = 0.01128, i.e., a little over 1%.

(Thanks to livesoft for PM alerting me to the typo--I should finish my coffee before posting in the morning!) Still very tax efficient.
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dratkinson
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Re: Qualified Versus Unqualified Dividends

Post by dratkinson »

I've tried to match up the yearend distributions estimate and 1099DIV.

My conclusion. When a fund declares STCG/LTCG from internal fund operation:
--LTCG from internal fund operation are reported on 1099DIV box 2a, which flows to Sch D line 13.
--STCG from internal fund operation are reported on 1099DIV box 1a, which flows to Sch B part 2.

My reasoning.
--1099DIV box 2a says "Total capital gains", but these dividends flow to Sch D line 13 as LTCG, so "Total capital gains" does not include the STCG listed on the yearend distributions estimate.
--So 1099DIV box 1a must contain total dividends (qualified + not qualified) + STCG from internal fund operation, because there is no other place on 1099DIV to list STCG reported on yearend distributions estimate.
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