Fund End of Year Capital Gains Distribution Question

[Seattle]

Sorry - a novice here - might be a stupid question. But I am trying to figure out something around the end of year capital gains distribution for funds and what is best to do.

My situation. I am going to get an approx $44K distribution from my Vanguard Wellesley position in my after tax portfolio. (30,000 shares X $1.48 distribution per share) this year. I am in the 39.6% tax bracket for 2015.

I have about $200K in losses I am carrying from the 1999 bubble and a couple of other mistakes I made. Also, as of today, I have a $25K loss in this fund if I sold it today.

I just recently FIRED and am going to completely re-do my entire portfolio which will include selling my position in Wellesley and harvesting the loss.

My Question. Should I sell my position in Wellesley now and avoid the $44K Capital Gains Distribution or is there any benefit to getting the $44K distribution since I have past losses to counter it since I am going to sell my position in Wellesley anyway? I am just trying to avoid any more taxes in 2015 but don't want to be stupid either. Just don't see any advantage in taking that distribution if I can help it.

I believe the answer is to go ahead and sell the Wellesley now and avoid the capital gains distribution if I am going to get out of that fund anyway as part of my FIRE portfolio overhaul where Wellesley isn't going to be in the mix. But wanted to check with all you smart people to help me out with this...

Thanks in advance. I love this board - some brilliant people here that help a lot...

 

[LOL!]

Yes, definitely sell now. The more you increase your carryover losses, the better you can have no taxable income in future years from selling assets with gains. The more you have no taxable income in future years, the better positioned you will be for conversions to Roth IRAs.

1999? And not 2008? I am gob-smacked!

 

[kaneohe]

In principle, it should make no difference since value of fund will drop by the amount of the distribution . Sell Before Fund Distribution?

 

[scrabbler1]

If you know in advance that the distribution will contain a short-term portion and a long-term portion, then if your own sale is all long-term you will save on taxes. A short-term cap gain distribution is treated as ordinary income (i.e. non-qualified dividends) and cannot be offset by losses, short-term or long-term, within Schedule D.

 

[kaneohe]

If you know in advance that the distribution will contain a short-term portion and a long-term portion, then if your own sale is all long-term you will save on taxes. A short-term cap gain distribution is treated as ordinary income (i.e. non-qualified dividends) and cannot be offset by losses, short-term or long-term, within Schedule D.

good point .....so no advantage in waiting and possibly worse off if you do.

 

[Seattle]

If you know in advance that the distribution will contain a short-term portion and a long-term portion, then if your own sale is all long-term you will save on taxes. A short-term cap gain distribution is treated as ordinary income (i.e. non-qualified dividends) and cannot be offset by losses, short-term or long-term, within Schedule D.

Thanks for this. Very helpful. The dividend for this fund posts Dec 16th, so I am going to get that and then sell the fund and avoid the capital gains distribution.

 

[audreyh1]

In principle, it should make no difference since value of fund will drop by the amount of the distribution . Sell Before Fund Distribution?

It can make a difference tax-wise.

If your gain in the fund is less than the estimated distribution, it will be better to sell ahead rather than pay extra taxes for the privilege of holding an unrealized loss in the fund.

 

[kaneohe]

It can make a difference tax-wise.

If your gain in the fund is less than the estimated distribution, it will be better to sell ahead rather than pay extra taxes for the privilege of holding an unrealized loss in the fund.

audrey, OP said the whole position is going to be eliminated so, except for the scrabbler exception, won't the results be the same?

 

[kaneohe]

Thanks for this. Very helpful. The dividend for this fund posts Dec 16th, so I am going to get that and then sell the fund and avoid the capital gains distribution.

You may want to get a 2nd opinion about this.....my impression was that the value of the dividend gets built into the NAV so if you sell before the proper date (record?) and don't get the dividend, your gains are LTCG (assuming you've owned the shares long enough) but they will be dividends if you receive the distribution with both qualified/non-qualified components.........so similar to the CG distribution.

 

[audreyh1]

audrey, OP said the whole position is going to be eliminated so, except for the scrabbler exception, won't the results be the same?

Right, if she plans to sell all this year. But I think I would still sell ahead just to avoid having more transactions to report.

Not to mention some of the distribution will probably be taxed at ordinary income rates since it is a balanced fund, and she can avoid that.

Vanguard hasn't declared the income distributions yet (so there is probably more coming than just the $44K), and they don't say how much of the capital gains dist is long term. Most fund companies tell you this as part of the estimate.

 

[LOL!]

You really want to avoid getting the dividend, too, as it will not be 100% qualified anyways. If you invest the money in a fund that then pays dividend, then choose a fund that pays 100% qualified dividends and hold the shares at least 61 days, so that the dividend is qualified to you.

 

[Seattle]

You really want to avoid getting the dividend, too, as it will not be 100% qualified anyways. If you invest the money in a fund that then pays dividend, then choose a fund that pays 100% qualified dividends and hold the shares at least 61 days, so that the dividend is qualified to you.

Good suggestion. Thanks. Wellesley is not 100% qualified dividends? Guess I need to go research that.

My plan was to move to a simplified FIRE post tax portfolio - all Vanguard (Total Stock Market, Total Intermediate Bond Market, etc.) Any recommendations on funds that produce 100% qualified dividends?

 

[audreyh1]

Good suggestion. Thanks. Wellesley is not 100% qualified dividends? Guess I need to go research that.

My plan was to move to a simplified FIRE post tax portfolio - all Vanguard (Total Stock Market, Total Intermediate Bond Market, etc.) Any recommendations on funds that produce 100% qualified dividends?

Wellesley holds a high % of bonds. Dividends from those are not qualified.

Only certain stocks generate qualified dividends.

Total stock market may be mostly qualified dividends, but no bond fund will.

 

[RE2Boys]

Your 200K in carry forward losses will offset your $44K in LT cap gain distributions on Schedule D, so you won't have any taxable cap gains until you use up the carry forward losses.

 

[LOL!]

Good suggestion. Thanks. Wellesley is not 100% qualified dividends? Guess I need to go research that.

My plan was to move to a simplified FIRE post tax portfolio - all Vanguard (Total Stock Market, Total Intermediate Bond Market, etc.) Any recommendations on funds that produce 100% qualified dividends?

Some funds 100% qualified dividends in 2014:
VTI / VTSAX Vanguard Total Stock Market Index
VTV Vanguard Value Index (large-cap)
VLCAX Vanguard Large-cap index
I expect VFIAX and other large-cap index funds from Vanguard will also have 100% qualified dividends and so will their tax-managed funds.

Look at your 1099-DIVs from 2014 and see what they say.

 

[Seattle]

Some funds 100% qualified dividends in 2014:
VTI / VTSAX Vanguard Total Stock Market Index
VTV Vanguard Value Index (large-cap)
VLCAX Vanguard Large-cap index
I expect VFIAX and other large-cap index funds from Vanguard will also have 100% qualified dividends and so will their tax-managed funds.

Look at your 1099-DIVs from 2014 and see what they say.

Awesome. Thanks. Very helpful. I love this forum, you guys are really great.

And BTW: somebody on this thread said "she"...correction, I am a dude...

 

[Seattle]

Your 200K in carry forward losses will offset your $44K in LT cap gain distributions on Schedule D, so you won't have any taxable cap gains until you use up the carry forward losses.

So, based on that, I should go ahead and take the $44K of LT cap gain distributions, use my $200K of losses to offset it and I am further ahead then with little tax issues?

 

[MichaelB]

Taking the distribution only gives you more ordinary income that will be taxed at the top marginal rate. As has already been pointed out, if you sell before that date you only have LTCG. In this case negative, since your cost basis is above market price. You can accrue the loss and use it at the rate of $3K per year at the marginal ordinary income rate. That's the greatest value.

 

[RE2Boys]

So, based on that, I should go ahead and take the $44K of LT cap gain distributions, use my $200K of losses to offset it and I am further ahead then with little tax issues?

The dividend distribution though would still be taxable income, only a portion of the dividend will be qualified (subject to 15 or 20% treatment), the remainder would be at your marginal tax rate (39%??)

So if planning to sell in near term, better to sell prior to any further distributions such that have no Dec Wellesley income taxed at regular rate, but increase your capital loss carry forwards, use them next year (up to $3K)

With your capital loss carry forward, it's not the cap gain distribution you need to be concerned about for 2015, it's the regular quarterly income distributions that will effect your taxes.

 

[audreyh1]

Sell ahead of any distributions.

You're probably getting more than the $44K you estimate, as Vanguard hasn't yet published the income dist estimate, and some of that will certainly be subject to your very high ordinary income tax rate.

Selling ahead will keep it all long-term, and more realized loss, which can be used against future gains.

 

[LOL!]

So, based on that, I should go ahead and take the $44K of LT cap gain distributions, use my $200K of losses to offset it and I am further ahead then with little tax issues?

No. I think that was [-]bad advice[/-] misunderstood. You told us if you sell now, then you will realize a loss. By realizing a loss now before the distribution, you get other taxpayers to help pay you for your loss. Sell now before the distribution and increase your carryover losses from around $200K to $225K and use them wisely in the future.

And folks in the 39.6% marginal income tax bracket pay qualified dividend taxes at something like 23.8% (not 15%, not 20%) and non-qualified dividends at 39.6%.

While you won't pay that on the LTCG distribution if you get it after you sell because you will end up selling by $44K less (get it? Paid $44K LTCG, fund drops $44K simultaneously, you sell for loss of $44K+$25K), it is that dividend distribution that you don't want that will be paid at the same time.

 

[RE2Boys]

No. I think that was bad advice. .

Wasn't advice but a statement of fact that the carried losses will take care of the CG distribution so no concern should be warranted. See post #19 for my advice. I agree with your conclusion.

 

[audreyh1]

Wasn't advice but a statement of fact that the carried losses will take care of the CG distribution so no concern should be warranted. See post #19 for my advice.

Only the long-term cap gain distribution. Won't help with shirt-term cap gain dist or any non-qualified dividends which Wellesley will certainly be paying out a good chunk since it is 60% bonds.

Short-term cap gain dists from mutual funds are a problem, because they are always treated as ordinary income by the 1040D - you never get to apply them against cap losses.

They may be a small percentage of the total dist, since they usually are, but since Vanguard doesn't specify the breakdown between short and long in their estimate doc, this is an unknown. Well, OK, they say that info will be released on Dec 11.

But by selling ahead, the poster can guarantee everything will be treated as a capital loss.

 

[LOL!]

Wasn't advice but a statement of fact that the carried losses will take care of the CG distribution so no concern should be warranted. See post #19 for my advice. I agree with your conclusion.

Sorry, changed my response.