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capital gains tax question
Old 01-31-2006, 07:08 PM   #1
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capital gains tax question

I'm slowing building up my Vanguard index fund portfolio through regular contributions and currently I'm making a decent salary.

Given the current captial gains tax rates, would I be able to keep more of my gains (after taxes) if I hold them for a long time and then start selling some if my income were to drop for some reason (say ER for example)?

I don't plan to sell yet, but if I did sell some today, then I'd probably have to pay 15% in LT capital gains tax.
But if I got laid off tomorrow (hopefully not), and I sold some shares for gas money, then I would only pay 5% in LT capital gains tax?

But it's also possible that the capital gains tax rates will be higher when I retire, say 20 years from now.

A semi-related question also - will Vanguard keep records for calculating a cost basis for those gains over the course of decades? I have paper year-end statements in my files, but I'm worried just in case my other electronic copies somehow get erased, etc.

Do they help with cost basis calculations for taxes? Is it harder to calculate cost basis if you have your dividends re-invested each quarter?

Thanks.

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Re: capital gains tax question
Old 01-31-2006, 07:18 PM   #2
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Re: capital gains tax question

This pretty well describes it.

http://www.fool.com/taxes/2001/taxes010105.htm

Keep your own records, I havent found ANYONE that calculates your basis for you, at least not reliably. Vanguard keeps an 'average cost' that they DONT pass to turbotax, you have to type it in. You may not want to use the 'average cost' method.
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Re: capital gains tax question
Old 01-31-2006, 08:06 PM   #3
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Re: capital gains tax question

I might be stupid but...

In my taxable accounts, I don't automatically reinvest distributions. Instead, I wait and just do it maybe once per year. It adds a little drag to performance but simplifies tax preparation.

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Re: capital gains tax question
Old 01-31-2006, 09:32 PM   #4
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Re: capital gains tax question

Quote:
Originally Posted by just_hatched
Do they help with cost basis calculations for taxes?* Is it harder to calculate cost basis if you have your dividends re-invested each quarter?
Yes, you keep more of your gains the less you sell. If you have losses though, you want to sell this before the end of year and perhaps buy back after 30 days. Let me repeat: always harvest your tax losses.

My experience is similar to CFBs.* The mutual fund companies don't keep track of things for you the way you would want them to.

Yes, it is harder to calculate cost basis if you have your dividends re-invested.

For more help, here's the IRS publication on all this:
http://www.irs.gov/publications/p564/index.html

Another tip: learn to use the IRS web site to your advantage.
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Re: capital gains tax question
Old 01-31-2006, 09:48 PM   #5
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Re: capital gains tax question

Reading IRS publications reminds me why I may not want to become a CFP after all...

Thanks for the links, I'll just keep re-investing my dividends, keep all of my statements, and hope that it'll be many years down the road before I need to worry about it.

Just before I sell, then I'll come back to the board and ask if anyone has made an EZ-cost-basis spreadsheet.
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Re: capital gains tax question
Old 01-31-2006, 11:07 PM   #6
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Re: capital gains tax question

Computing cost basis for re-invested dividends/cap. gains is actually quite simple.* You just treat each share gained via a distribution the same as if it had been purchased in cash by you.

So, in your statements, you might have a combination of cash purchases and reinvestments.* Just treat each of them the same.
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