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Old 07-09-2014, 02:58 PM   #21
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… and pay 0% federal tax on our dividends and get a nice tax credit for international equities in our taxable accounts.
The above is only true if the foreign taxes (and thus foreign tax credit (FTC)) is relatively low and you get a "gimme" because they are below a limit for checking carefully if you are allowed a credit, see Form 1116. But how to explain this ….

The idea of the FTC is to not pay taxes twice, but pay taxes at least once. So if the US says your taxes on foreign dividends are 0%, you should not get a foreign tax credit because you would not be offseting any extra US taxes. Form 1116 is complicated for this reason.
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Old 07-09-2014, 03:01 PM   #22
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Even with munis, the AMT steps in so the government still gets its bite!

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Bond dividends are taxed at your marginal income tax rate unless they are tax-exempt from tax-exempt muni bond funds.

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Old 07-09-2014, 03:30 PM   #23
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I'm not a fan of dividends. They just require me to receive income and pay taxes when the funds choose, rather than realized capital gains, which allow me to choose when to take the gains and pay the taxes. That being said, index funds tend to pay fewer capital gains than actively managed funds, because they don't have managers constantly buying and selling funds to time the market or take advantage of all the research they charge for. So an index fund is still the best bet for minimizing dividends and capital gains while in a higher tax bracket.
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Old 07-09-2014, 04:37 PM   #24
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The above is only true if the foreign taxes (and thus foreign tax credit (FTC)) is relatively low and you get a "gimme" because they are below a limit for checking carefully if you are allowed a credit, see Form 1116. But how to explain this ….

The idea of the FTC is to not pay taxes twice, but pay taxes at least once. So if the US says your taxes on foreign dividends are 0%, you should not get a foreign tax credit because you would not be offseting any extra US taxes. Form 1116 is complicated for this reason.
The relatively low amount of international equities in our taxable accounts allow us to use the simplified method - no form, just a credit for foreign taxes paid. It can be up to $600 a year for a couple for 2013. Also, unlike domestic equity dividends which are all qualified dividends in our case, some of our international dividends are not qualified, and so is included in ordinary income subject to tax.

http://www.irs.gov/pub/irs-pdf/i1040.pdf see instructions for line 47 on page 44.
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Old 07-09-2014, 04:41 PM   #25
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While minimizing taxable events in your taxable accounts is nice, it is not something you need to avoid 100%. Choose your AA, then do the best placement of shares that you can. You can spreadsheet a few scenarios if you are unsure about that. You don't want to fill your IRA/Roth accounts with a bunch of low total return stuff just to avoid minor taxes on dividends.
+1 That is the way I looked at it as well. Overall AA first, then tax efficiency second. Luckily, our mix of taxable, tax-deferred and tax-free accounts can be very tax efficient while still conforming to our target AA.

But don't let the tax tail wag the investing dog.
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Old 07-09-2014, 09:15 PM   #26
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Ah - thank you for that 'qualification'

That was a missing piece of information to my understanding of how dividends are distributed by the total index funds.

My original poorly worded post was in regards to several other on-line posts and articles stating that dividends ('ordinary') are - ok, maybe not 'evil', but not tax efficient in an after tax portfolio.

I feel more inclined now to do some slow AA changes to fewer funds and ETFs because I do like the idea of a lazy portfolio in FIRE.
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Old 07-09-2014, 09:35 PM   #27
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Just a few thoughts on this discussion....

First off, getting a foreign tax credit is a net zero IMO.... this money was taken out of the dividends you would have received.... so all you are getting back is your own money... now, if the fund was in an IRA, you do lose that benefit...


BUT, if you have a fund of funds.... IOW a fund that holds shares in an international fund.... that tax credit gets lost between the two funds... I called Vanguard to confirm as I was looking for my credit and it did not come...


As for holding bonds in a retirement account etc... I think with this low rate environment is is not as important as it used to be... back when bonds were paying 5% to 7% (or higher) it was real money.... now that bonds pay less than some dividend funds.... not so much....
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Old 07-10-2014, 12:41 AM   #28
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Dividends are subject to preferential tax rates compared to interest and that is why they are carried in taxable accounts. We are retired and pay 0% federal tax on our dividends and get a nice tax credit for international equities in our taxable accounts.
Bingo! 2/3rds of my investments are in an IRA, so I have been able -so far- to enjoy the 15% tax bracket's perk of tax free qualified dividends and long term capital gains
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Old 07-10-2014, 04:51 AM   #29
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I never met a dividend I didn't like....
well we all love dividends ,at least we did but there are new concerns today surfacing about them.


compounding on investor money is the key to growing money.

a penny doubled and compounded every day for only 31 days is over 10 million bucks . such is the power of compounding.

compounding to our money is what blood is to our body.

what is interesting is dividends have increased to the highest levels since 1998 with a record increase of 17.8 billion dollars in increased dividends payed out just 1st quarter. the 2nd quarter may be even bigger.

all dow stocks pay dividends and 84% of the s&p 500 does too.

but according to a study done by howard silverblatt at s&p those dividends have been coming at a price as they go up and up..

a good part of that capital from free cash flow is gone forever and no longer available for compounding.

mid-caps and small caps who pay little in dividends have been far and away providing far better compounding and use of investor money for much greater returns..

in fact one of the least efficiant ways to grow investor money now is paying it out as a dividend.

as chuck akre said ,free cash flow in a company can be used to compound by buying back its own stock, investing in its own company or buying other companies . cash flow paid out as dividends loses its compounding ability and much of it is gone forever and can no longer compound.

many of the great companies in the s&p 500 have lagged behind their non dividend payers in the midcap and small cap markets who now seem to be much more efficient at generating compounding on investor money.

midcaps and small caps have compounded the last 5 years at rate of 5-6% higher then their dividend paying cousins.

something to think about in our new normal..
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Old 07-10-2014, 08:22 AM   #30
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Just a few thoughts on this discussion....

First off, getting a foreign tax credit is a net zero IMO.... this money was taken out of the dividends you would have received.... so all you are getting back is your own money... now, if the fund was in an IRA, you do lose that benefit...


BUT, if you have a fund of funds.... IOW a fund that holds shares in an international fund.... that tax credit gets lost between the two funds... I called Vanguard to confirm as I was looking for my credit and it did not come...


As for holding bonds in a retirement account etc... I think with this low rate environment is is not as important as it used to be... back when bonds were paying 5% to 7% (or higher) it was real money.... now that bonds pay less than some dividend funds.... not so much....
While this is very true and I have been tempted to reduce my bond holdings, there are some sound postings and opinions that bonds are still an important part of overall AA for overall portfolio stability during market pull backs.

I suppose one could say - hey, ride the bull baby and sneak back to bonds later.....not sure what I will be tweaking for the rest of '14.
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Old 07-10-2014, 10:02 AM   #31
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While this is very true and I have been tempted to reduce my bond holdings, there are some sound postings and opinions that bonds are still an important part of overall AA for overall portfolio stability during market pull backs.

I suppose one could say - hey, ride the bull baby and sneak back to bonds later.....not sure what I will be tweaking for the rest of '14.
I surely hope our "bull baby" is still "rideable", and not in a state like this (photo linked from the Web). I do not care about them darn bonds.

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Old 07-10-2014, 11:12 AM   #32
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Don't let the taxes tail wag the investing dog.
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Old 07-10-2014, 02:33 PM   #33
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But my wife for example has a Vanguard 500 index etf and it throws off a lot of ordinary dividends.

Actually, Vanguard's 500 fund didn't have any ordinarydividends last year. They were 100% qualified dividends, which are eligible for reduced tax rates.

https://personal.vanguard.com/us/ins...nd-income-2013

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Old 07-10-2014, 05:43 PM   #34
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Don't let the taxes tail wag the investing dog.
That's original. (Hint: See post #25)
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Old 07-10-2014, 05:49 PM   #35
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Actually, Vanguard's 500 fund didn't have any ordinarydividends last year. They were 100% qualified dividends, which are eligible for reduced tax rates.

https://personal.vanguard.com/us/ins...nd-income-2013

Bob
Technically,
Those qualified dividends are ordinary dividends (see your 1099DIV and how you report dividends on your Schedule B and Form 1040). Some ordinary dividends are also qualified.

So all those ordinary dividends paid by Vanguard S&P500 index fund were qualified.
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Old 07-17-2014, 11:45 AM   #36
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Dividends are taxed at a lower rate than interest income, hence the advice to keep dividend-producers in a taxable account if the retirement account is already full of interest-earning instruments. Another option is to put the equity share of a taxable account into non-dividend-paying stocks like Berkshire Hathaway.
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Old 07-17-2014, 01:58 PM   #37
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Technically, …
Those qualified dividends are ordinary dividends (see your 1099DIV and how you report dividends on your Schedule B and Form 1040). Some ordinary dividends are also qualified.

So all those ordinary dividends paid by Vanguard S&P500 index fund were qualified.
I did check Schedule B and you are right - the Vanguard 500 dividends are listed as part of the total reported on line 9a of the 1040 form as "ordinary dividends".

So...then how are they accounted for as 'qualified' and taxed more favorably as LTCGs?

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Dividends are taxed at a lower rate than interest income...
Not sure I follow that...."ordinary" dividends are taxed as "ordinary" income, right?
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Old 07-17-2014, 02:05 PM   #38
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So...then how are they accounted for as 'qualified' and taxed more favorably as LTCGs?
Please look carefully at the rest of the your tax return. It should be quite educational.
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Old 07-17-2014, 04:10 PM   #39
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Goal is to minimize fees and taxes, since it's probably impossible for most of us to avoid them entirely, particularly if you have taxable investments for ER. Hence the goal is to maximize efficient placement, as others have said, not avoid dividends/interest/etc.

Don't let the tax tail wag the dead horse, or something like that.
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Old 07-17-2014, 05:22 PM   #40
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Don't let the taxes tail wag the investing dog.
+1......You just beat me to the punch on this post.
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