I've had a margin account at vanguard more than a decade, but never done any margin investing. I like the idea of having the margin for quick access to lots of emergency cash. E.g. in case I total a rental car or need to bail someone out of jail.
I just now learned that for a long time (2003?) the
IRS has been disadvantaging margin accounts, taxing the dividends as ordinary income if the stock has been lent out. I recently got a letter from Vanguard saying (OCR scanned):
Quote:
A reimbursement will appear on
your brokerage account statement
On or before May 21, 2021, your Vanguard Brokerage margin account will be credited with a substitute payment .
reimbursement. This payment is to offset the tax consequences of receiving substitute payments taxed at the ordinary
income tax rate instead of the preferential tax rate applied to qualified dividends. If you have more than one margin
account, each affected account will receive this credit.
Vanguard Brokerage clients receive substitute payments instead of dividends when we lend stocks in a margin account
(as permitted in the Vanguard Brokerage Margin Account Agreement) through a stock's ex-dividend date. Substitute
payments received in 2020 were reported in Box 8, "Substitute payments in lieu of dividends or interest," of your 2020
Form 1099-MISC. Eligible substitute payment reimbursements will only be credited to eligible accounts that are open
on the reimbursement date.
Your reimbursement payment will be 8.97% of eligible substitute payments
Because the tax status of each affected account holder isn't known, the current-year reimbursement rate of 8.94%
reflects the 22% tax rate of the majority of taxpayers. The rate also includes an adjustment of taxes since the
reimbursement is taxable income and will be reported in Box 3, " Other income," of your 2021 Form 1099-MISC.
Questions?
If you have any questions, call us at 877-662-7447 from Monday through Friday, during normal business hours.
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I started investigating and it seems that the amount of the payment (on 5/20 labelled as Income) was only $3.49, from a brokerage account of nearly one million.
So if this is 8.97 percent then the total seems to be under $40 for the year. Because my early retired IRS income is only about $35k most years, I don't think I have much to worry about. The difference between my zero cap gains rate and the ordinary income rate on $40 is going to be in the ballpark of $3.49 so I don't think I'm losing more than a few bucks a year if that. At least this year. Not a bad fee to keep access to hundreds of thousands of dollars emergency cash.
Just thought I'd post since this is new to me. Hopefully those of you who have looked into this matter will double check my conclusion that I shouldn't worry much about this, or refute as appropriate.
Also, I don't remember getting letters like this in the past; is this compensation a new thing?