Vanguard Tax-Managed Balanced Fund tax distributions

The Vanguard Tax-Managed Balanced Fund is specifically designed for placement in taxable accounts. The fund offers a portfolio balanced between a  45% - 50% allocation to stocks benchmarked to the Russell 1000 Index and  a 50% - 55%% allocation to municipal bonds benchmarked to the Barclays 7 Year Municipal Bond Index. The 50% or greater allocation to municipal bonds is required for the fund to pass through municipal bond interest as tax-exempt income. The fund samples the Russell 1000 index with a bias towards lower dividend stocks.

Distributions
The fund has not distributed a capital gain since fund inception in 1994. The fund has harvested net realized losses in a plurality of years in its history and has possessed an accumulated loss carryforward since inception (see the second tab in Table 5 below.) The fund has distributed 100% tax-preferenced qualified stock dividends since the establishment of the preference by law in 2004. The fund's municipal bond dividends have been federally tax exempt since inception. The fund is allowed by prospectus to invest up to 20% of the bond portfolio in private activity bonds, which are subject to the Alternative Minimum Tax (AMT); the fund's tax-exempt dividends are also subject to state and local taxation.

Note:
 * For current tax attributes and distributions see Vanguard

Tax rates
Mutual fund distributions will be taxed according to the tax laws governing the investment over the holding period of the investment, which are subject to change. The actual tax imposed will depend upon each individual's tax rate and the timing of purchases and sales. The federal tax rates applicable to mutual fund distributions and investor sales of securities for the period 2013 onward are outlined below. Keep in mind that investment income may also be subject to state and local taxation.
 * 1) Short-term capital gains distributions are made from realized gains on securities held for one year or less. Short-term gains are taxed at ordinary income tax rates up to 39.6%. Mutual fund short-term gain distributions are included in a fund's ordinary dividend distribution; therefore, capital losses may not be subtracted from these distributions when computing taxes.
 * 2) Long-term capital gains distributions are made from realized gains on securities held for more than one year. Long-term gains are taxed at 0% for taxpayers in the 10% and 15% tax brackets, at 15% for taxpayers in the 25%, 28%, 33%, and 35% tax brackets, and at 20% in the 39,6% tax bracket. They are reported on tax Schedule D along with any other capital gains, and can be reduced by capital losses.
 * 3) Qualified dividends are the ordinary dividends that are subject to the same tax rate that applies to long-term capital gains. They should be shown in box 1b of the Form 1099-DIV you receive.
 * 4) When you sell at a loss you will either offset capital gains which would have otherwise been taxed at your capital gains rate or you will offset income (up to $3,000 maximum per year) which would have otherwise been taxed at your marginal income tax rate, or both. If you offset capital gains that would have otherwise not been taxed at all (because your capital gains tax rate is 0%) then this part of the tax loss harvest may be an outright loss.
 * 5) The Affordable Care Act imposes a Medicare surcharge of 3.8% on all net investment income (NII) once the taxpayer's adjusted gross income exceeds $200,000 (single) or $250,000 (married); while this tax is not part of the income tax, it has the same effect on investors as a higher tax rate. The NII tax begins to apply to individuals falling in the 33% tax bracket. Thus the top effective marginal tax rate is 23.8% on qualified dividends and long-term gains, 43.4% on ordinary investment income.

Mutual fund distributions will be taxed according to the tax laws governing the investment over the holding period of the investment, which are subject to change. The actual tax imposed will depend upon each individual's tax rate and the timing of purchases and sales. Bond fund interest income subject to federal taxation is taxed at marginal tax rates. The federal tax rates applicable to mutual fund distributions and investor sales of securities for the period 2008 - 2012 are outlined below. Keep in mind that investment income may also be subject to state and local taxation. Treasury bond interest is usually not taxed at the state and local levels.
 * 1) Short-term capital gains distributions are made from realized gains on securities held for one year or less. Short-term gains are taxed at ordinary income tax rates up to 35%. Mutual fund short-term gain distributions are included in a fund's ordinary dividend distribution; therefore, capital losses may not be subtracted from these distributions when computing taxes.
 * 2) Long-term capital gains distributions are made from realized gains on securities held for more than one year. Long-term gains are taxed at 0% for taxpayers in the 10% and 15% tax brackets and at 15% for taxpayers in the 25%, 28%, 33%, and 35% tax brackets. (These tax rates are mandated for 2008-2012.) They are reported on tax Schedule D along with any other capital gains, and can be reduced by capital losses.
 * 3) Qualified dividends are the ordinary dividends that are subject to the same 0% or 15% maximum tax rate that applies to net capital gain. They should be shown in box 1b of the Form 1099-DIV you receive. Qualified dividends are subject to the 15% rate if the regular tax rate that would apply is 25% or higher. If the regular tax rate that would apply is lower than 25%, qualified dividends are subject to the 0% rate.
 * 4) When you sell at a loss you will either offset capital gains which would have otherwise been taxed at your capital gains rate or you will offset income (up to $3,000 maximum per year) which would have otherwise been taxed at your marginal income tax rate, or both. If you offset capital gains that would have otherwise not been taxed at all (because your capital gains tax rate is 0%) then this part of the tax loss harvest may be an outright loss.

Tax analysis
The following table examines the tax consequences of holding the Vanguard Tax-Managed Balanced Fund in a taxable account. The fund's dividends are federally tax exempt and the fund's stock dividends are 100% qualified dividends. The fund has never distributed a taxable gain. The tables include a 5% state tax rate (which of course may vary according to state). Two potential tax factors are not included in the computations:
 * 1) A portion of the fund's dividends may come from a shareholder's state of residence. If so, this portion of the fund's dividend may be exempt from state tax.
 * 2) A portion of the fund's dividends may be subject to the alternative minimum tax, should the shareholder be subject to this tax.

The table examines tax costs under the current tax regime, using the fund's average tax exempt dividend, average qualified dividend, and average capital gain. The table also provides for a higher tax regime, with no tax-preferenced qualified dividends, and higher marginal and capital gains tax rates. In addition, the table does not include the tax cost should one sell an investment in the fund and realize a gain.

Table 4.