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Quick, (possibly dumb), question on investment taxes.
Old 05-14-2016, 07:19 AM   #1
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Quick, (possibly dumb), question on investment taxes.

Hi, DW and I have finally gotten to the point that we are seeing a fairly substantial, for us, after-tax diversified portfolio of index funds with Fidelity. I don't intend to sell until I need to so any gains will be taxed at the 20% capital gains rate. My question is about dividends. Do I need to make sure I have selected the option to reinvest all dividends in that security to maintain tax efficiency? If those dividends are instead deposited into my core MM account, are these considered short-term gains and taxed as regular income? Pretty basic I know and thanks much.
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Old 05-14-2016, 07:33 AM   #2
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I'm hoping someone with more knowledge posts, as I am far from a tax expert. But it has always been my understanding that dividends in taxable accounts are current taxable income even if they are reinvested.

Edit to add: Fairmark agrees with me http://www.fairmark.com/mutual/dividend.htm

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When you have your dividends reinvested you're treated the same as if you received the dividend in cash and then used that money to buy additional shares. That means two things:

. You'll report the same income from a reinvested dividend as you would from a dividend you received in cash.
. The reinvestment is an additional purchase, causing an increase in the cost basis of your overall holdings in the mutual fund.
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Old 05-14-2016, 07:34 AM   #3
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Originally Posted by mbnj77 View Post
Hi, DW and I have finally gotten to the point that we are seeing a fairly substantial, for us, after-tax diversified portfolio of index funds with Fidelity. I don't intend to sell until I need to so any gains will be taxed at the 20% capital gains rate. My question is about dividends. Do I need to make sure I have selected the option to reinvest all dividends in that security to maintain tax efficiency? If those dividends are instead deposited into my core MM account, are these considered short-term gains and taxed as regular income? Pretty basic I know and thanks much.
Dividends are taxed at 15 or 20 % (depending on income) Reinvestment makes no difference you pay taxes when the dividends are recieved (The 20% rate applies on incomes above about 430k depending on filing status)
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Old 05-14-2016, 07:37 AM   #4
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If those dividends are instead deposited into my core MM account, are these considered short-term gains and taxed as regular income?
They're not short (or long) term gains; they're dividends. Taxed at the rate for dividends, whether reinvested or not. Line 9 on your tax return.
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Old 05-14-2016, 08:48 AM   #5
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Well, you learn something new everyday; particularly on this site. Why I thought it was treated as regular income is beyond me but this is good news indeed. Thanks very much.
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Old 05-14-2016, 09:22 AM   #6
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Dividends are treated the same way from a tax standpoint regardless of whether or not they are reinvested. Qualified dividends are taxed at whatever you long term cap gain tax rate is. Ordinary dividends are taxed at whatever you income tax rate is.
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Old 05-14-2016, 09:52 AM   #7
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Wait, that is different than the other answers then. What makes one qualified vs. unqualified? If they are taxed at "whatever my income tax is", then they WOULD be treated as regular income. Not something separate and distinct that would be taxed at either 15% or 20% as meierlde said. Now I am confused again, (frankly, easily done but I'm trying).
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Old 05-14-2016, 10:05 AM   #8
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Originally Posted by mbnj77 View Post
Wait, that is different than the other answers then. What makes one qualified vs. unqualified? If they are taxed at "whatever my income tax is", then they WOULD be treated as regular income. Not something separate and distinct that would be taxed at either 15% or 20% as meierlde said. Now I am confused again, (frankly, easily done but I'm trying).
Ordinary Dividends:

Some examples of dividends that are unqualified, and thus do not qualify for the tax preference and are taxed at ordinary income tax rates, are those paid out by:

Real estate investment trusts (REITs)
Master limited partnerships (MLPs),
Dividends paid on employee stock options
Dividends paid by tax-exempt companies
Dividends paid on savings or money market accounts.

Qualified Dividends:

A qualified dividend is a type of dividend that is taxed at the capital gains tax rate. Generally speaking, most regular dividends from U.S. companies with normal company structures (corporations) are qualified.

Check this article:

http://www.dividend.com/dividend-edu...ied-dividends/
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Old 05-14-2016, 10:07 AM   #9
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The Form 1099 that you receive from Fidelity will tell you whether they are ordinary dividends (Box 1a) or qualified dividends (Box 1b). Ordinary dividends are taxed at your marginal tax bracket for ordinary income, which range from 10% to 39.6% (e.g. - mine is currently 25%). Qualified dividends are taxed at the long term capital gains rate applicable to you. If you are in the 10% or 15% tax brackets, you pay 0% on capital gains and therefore 0% on qualified dividends. If you are in the 25% tax bracket and up, you pay between 15% and 23.8%, depending on your Modified Adjusted Gross Income.

In either case, the fact that the dividends were reinvested is irrelevant. It is the same as if you had received cash.

Here is Fidelity's explanation: https://www.fidelity.com/taxes/tax-t...fied-dividends
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Old 05-14-2016, 10:24 AM   #10
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Thanks very much for the clarification.
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Old 05-14-2016, 10:37 AM   #11
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Originally Posted by Gumby View Post
The Form 1099 that you receive from Fidelity will tell you whether they are ordinary dividends (Box 1a) or qualified dividends (Box 1b). Ordinary dividends are taxed at your marginal tax bracket for ordinary income, which range from 10% to 39.6% (e.g. - mine is currently 25%). Qualified dividends are taxed at the long term capital gains rate applicable to you. If you are in the 10% or 15% tax brackets, you pay 0% on capital gains and therefore 0% on qualified dividends. If you are in the 25% tax bracket and up, you pay between 15% and 23.8%, depending on your Modified Adjusted Gross Income............................................ .......
]
just to clarify.....the terminology used by IRS is confusing:
Box 1a is called Total ordinary dividends. Box 1b is called qualified dividends.
The amount in Box 1a includes Box 1b and perhaps more (Box 1a>=Box 1b).
The difference between the 2 is not qualified dividends and is taxed at ordinary income rates. Qualified dividends are taxed at more favorable rates.
Thus if Box 1a & Box 1b are both 1K, all of the dividends are qualified and 0 is
not qualified. The 1K is taxed at qualified dividend rates. Nothing is taxed at ordinary income rates.
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Old 05-14-2016, 11:03 AM   #12
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just to clarify.....the terminology used by IRS is confusing:
Box 1a is called Total ordinary dividends. Box 1b is called qualified dividends.
The amount in Box 1a includes Box 1b and perhaps more (Box 1a>=Box 1b).
The difference between the 2 is not qualified dividends and is taxed at ordinary income rates. Qualified dividends are taxed at more favorable rates.
Thus if Box 1a & Box 1b are both 1K, all of the dividends are qualified and 0 is
not qualified. The 1K is taxed at qualified dividend rates. Nothing is taxed at ordinary income rates.
Thanks for this. I just plug the numbers into HR Block at Home and it does the subtraction automatically, so I didn't even think of it.
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Old 05-14-2016, 01:57 PM   #13
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Thanks for this. I just plug the numbers into HR Block at Home and it does the subtraction automatically, so I didn't even think of it.
I've always wondered why they didn't call box 1a Total Dividends. Then you would know that you didn't know what ordinary dividends were and poke around. Because the word "ordinary" appears in the name, however, it is easy to make the assumption that you know and not even realize you don't.
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