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Old 02-19-2015, 09:47 AM   #21
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Please think more carefully about this:

Is it better to magically convert some of the AGI into qualified dividends or to have a lower AGI to begin with? Which is taxed at a higher rate: qualified dividends or no income?
Please read through my example again. There is no change at all between AGI in the two scenarios. The only difference is how much of the (equal) AGIs consists of qualified dividends. So your question should really be, "Is it better to magically convert some AGI to qualified dividends without increasing AGI at all?" I say the answer is yes.
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Old 02-19-2015, 09:57 AM   #22
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LOL, I'm not convinced that OP should have sold the international stock fund before the ex-dividend date. Your situation was different than OP's in that you were concerned about your short holding period making all of your dividends non-qualified. OP, on the other hand, appears to have owned the international fund at least since midyear and should be eligible to receive qualified dividends from the year end distribution.

So, as a simple example, suppose that OP owns 1,000 shares of an international fund that in early December was selling for $10 per share and has a cost basis of $12,000. Selling before the ex-dividend date would establish a $2,000 loss for tax purposes.

But let's say the fund is planning on issuing a $1 per share dividend in mid December. Ignoring the day to day fluctuations in NAV, that gives OP the option of waiting until late December to sell, receive a $1,000 dividend distribution in cash and then sell the fund at about $9 per share. The net result is $9,000 from the selling the shares - $12,000 cost basis + $1,000 dividends = $2,000 loss. I.e. OP would get the same net loss by waiting until late December to sell and end up with the same AGI as selling in early December. But waiting until late December would magically convert some of the AGI into qualified dividends, thus lowering the net tax bill more than selling in early December.

I am too lazy to run this scenario through tax software to verify the net tax effect. But it seems to me that waiting until after the ex-dividend date can't hurt one's tax situation and might very well help it.
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Originally Posted by LOL! View Post
Please think more carefully about this:

Is it better to magically convert some of the AGI into qualified dividends or to have a lower AGI to begin with? Which is taxed at a higher rate: qualified dividends or no income?

It is true that once one received the dividends, then waiting a couple of weeks to make them qualified might be useful, but avoiding them in the first place I think is better.
I think it depends on your circumstances. In the example, if you have other ordinary income it would be better to wait until the dividend is paid as that would create a bigger loss that can be used to offset more ordinary income and if you sold before the dividend is paid and then the qualified portion of the dividend attracts a preferential tax rate.

If you don't have other income then I'm not sure it matters if you have a $2k capital loss vs $1k of dividends and a $3k capital loss because your total income is a $2k loss no matter how you frame it.
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Old 02-19-2015, 12:59 PM   #23
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In the example, if you have other ordinary income it would be better to wait until the dividend is paid as that would create a bigger loss that can be used to offset more ordinary income and if you sold before the dividend is paid and then the qualified portion of the dividend attracts a preferential tax rate.

If you don't have other income then I'm not sure it matters if you have a $2k capital loss vs $1k of dividends and a $3k capital loss because your total income is a $2k loss no matter how you frame it.
I've just examined the 2013 Qualified Dividends and Capital Gains worksheet, and I think you're exactly correct. If you have ordinary income, a capital loss appears to be subtracted from the ordinary income first, not from the qualified dividends. You retain the benefit of having some of your AGI converted to qualified dividends through this maneuver.

To sum up the tax loss situation as I understand it: If you sell in early December, you get a $2,000 capital loss to subtract from ordinary income, which is worth $2,000 * .15 = $300 in the 15% tax bracket. If you sell in late December, you get a $3,000 capital loss to subtract from ordinary income, but also have to pay tax on the $200 portion of the dividends that is non-qualified. The net tax savings in the 15% tax bracket is $3,000 * .15 - $200 * .15 = $420. It appears to be well worth taking the trouble to wait and collect the dividend before selling your shares.

Edit: I should also explain that I got the $200 non-qualified dividends by making the approximation that 80% of the dividends would be qualified. I believe that's close to the percentage that Vanguard reported for OP's international fund. In real life, of course, you would have to use the actual percentage of qualified dividends as reported by your mutual fund company.
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Old 02-19-2015, 01:10 PM   #24
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And if you already have $5,000 (or $10,000 or $100,000) in tax losses from other things?
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Old 02-19-2015, 01:17 PM   #25
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And if you already have $5,000 (or $10,000 or $100,000) in tax losses from other things?
I was actually about to run some trial scenarios on just this type of situation, where the capital loss is larger than the maximum $3,000 deduction from ordinary income. You get a capital loss carryover, which may or may not be worth more than the effect on the current year's taxes. I think you would probably always come out ahead "in the long run", but it may require such a long wait as to not make it worth your while in real life.

Still, this is a real handy maneuver to remember for the next time I have to realize a capital loss. One's gut reaction is to avoid the year end dividend, but it's awfully easy to come up with a scenario where that's the wrong thing to do.
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Old 02-19-2015, 01:21 PM   #26
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And if you already have $5,000 (or $10,000 or $100,000) in tax losses from other things?
Then probably not, but we already conceded it is situational.
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