Tax Surprise-Section 199A Dividends

[hiker88]

I did Roth conversions last year with the plan for my income to not exceed the amount that would require me to pay Medicare IRMAA surcharges(I turn 65 in two years). After I received my final dividend payment in December 2023, I did a final Roth conversion to take my income to about $1000 below the predicted IRMAA limit. I just did my taxes and the Vanguard tax form shows my 2023 dividends to be $1200 more than what the Vanguard website shows. I called Vanguard and the representative told me that the dividend total shown on the website does not include Section 199A dividends that are included in the tax form. He told me the 199A dividends are produced by the VXUS ETF(international stock) that is the majority of my investments. The rep told me there is no easy way to know how much the 199A dividends will be until the tax form is released. I figure all I can do in the future is make sure my Roth conversions don't take me anywhere close to the IRMAA limit.

 

[Sunset]

I find IRMAA limits confusing.

We try to stay $5,000 below the IRMAA limit , and we don't have any more mutual funds, which in the past would occasionally surprise us with "declared capital gains" even though we didn't sell anything.

Why do you have the majority of investments in VXUS ?

 

[all4j]

doesn't solve your situation, but I think this is foreign tax paid, not 199a.

As you said, you only have a 'predicted' irmaa level now, so maybe you'll edge by. With irmaa, a dollar short isn't a bad thing

 

[audreyh1]

The 199A dividends are not additional, so that won’t be extra or add to AGI.

The foreign tax credit however will. You didn’t receive that income, but it was paid in taxes on your behalf. So you get a tax credit, but unfortunately it also increases your taxable income and AGI. This is a downside of owning any international fund.

Yeah the rep you talked to was wrong. Not Section 199A which doesn’t increase AGI but rather foreign income tax paid was additional.

But for 2025 which is when your IRMAA is affected, you don’t know what the limits are until Sept or October this year, so you might still be OK.

I leave lots of extra room for foreign tax credit related additional income which I don’t find out about until the following Jan sometime.

 

[hiker88]

I find IRMAA limits confusing.

We try to stay $5,000 below the IRMAA limit , and we don't have any more mutual funds, which in the past would occasionally surprise us with "declared capital gains" even though we didn't sell anything.

Why do you have the majority of investments in VXUS ?

I have the majority of my stock allocation in international because articles I've read from Vanguard, Fidelity, etc have said that the lower valuations of international mean better long term returns. However, they have been saying that for many years and international continues to fall behind the S&P500. I keep hoping eventually they will be right.

 

[audreyh1]

You just need more room for extra taxable income due to the foreign tax credit from international funds. You still might be OK for the 2025 IRMAA limits which aren’t yet known. Best guesses from the internet: https://thefinancebuff.com/medicare-irmaa-income-brackets.html

 

[hiker88]

Thanks for the information about the foreign tax credit. I now know to leave plenty of room below the IRMAA limit.

 

[RunningBum]

I found foreign taxes to be frustrating when trying to stay below a threshold especially after recharacterization of Roth conversions was no longer allowed. I had the mutual fund version of your ETF and used to estimate them as 8% of total dividends received for the year. I don't know if that's still accurate.

Dividends also were higher in that fund than the US index funds (total or S&P 500) and eventually I sold off the international fund one year. I blew way past my threshold but it set me up better for future years. Since my taxes had shrunk in retirement I wasn't able to take much of the foreign tax credit, so the advantage of holding international funds in taxable was negated. I lost a few thousand in FTC carryovers but it would have cost me more in lost ACA subsidies had I held the intl fund.

 

[audreyh1]

I am very frustrated with my international funds and the foreign tax credit these days. The tax forms are a pain. The unpredictability of the foreign tax credit and related extra income makes staying below a target IRMAA threshold more difficult, estimating is a tricky exercise. I don’t have a large international fund exposure but at this point I wish it were 0. Plenty of multinational exposure in total stock market anyway.

 

[Midpack]

I am very frustrated with my international funds and the foreign tax credit these days. The tax forms are a pain. The unpredictability of the foreign tax credit and related extra income makes staying below a target IRMAA threshold more difficult, estimating is a tricky exercise. I don’t have a large international fund exposure but at this point I wish it were 0. Plenty of multinational exposure in total stock market anyway.

+1. I don't want the tax hit, or I'd sell my international fund as well. And since I've been doing FTCs for years now, I know my way around the form at least - PITA.