Vanguard Wellesley and Capital Gains Taxes questions

[Earl E Retyre]

I have a few questions related to Wellesley and Capital Gains Taxes. I may be totally confused and appreciate your help ….

I believe Vanguard just announced that the 2018 estimated Vanguard capital gains taxes for the admiral Wellesley Fund will be 3.95% this year. This will affect my 2018 taxable income and potentially my eligibility for ACA in the future.

Here are my questions:
(1) I have $256k in Wellesley VWIAX in my taxable account which I believe will produce $10,100 in capital gains this year which will be taxed as ordinary income. Is that correct?

I am OK with this for 2018, but if I had a similar event in 2019, then I would not be eligible for ACA next year (which would cost me about $1k per month). So, I am thinking of selling VWIAX in my taxable account and buying it in my non-taxable account.

(2) If I sell all of my VWIAX, I think I would pay NO capital gains taxes on the sale since my total Adjusted Gross Income is less that $77,400 and all of the VWIAX I purchased has been longer than 1 year so it is all long term capital gains. Is that true? I live in Texas if that matters.

(3) If so, when should I sell VWIAX? I think the distribution occurs on 12/19. So, if I sell it on 12/20 then I believe I will receive the $10k capital gain this year which I would not want to miss. Then assuming (2) is correct, I would pay no taxes on the sale. And next year, I would not be impacted since I would no longer own VWIAX in my taxable account. All true?

Thanks for your help.

Earl

 

[Sunset]

1 will be taxed as dividend/cap gain rate which can be zero.
2 yes if a couple.
3 yes.

Sounds like you understand it well enough.
You could buy BRK.B in your taxable account, has no dividends so you control when you get $$$ income via capital gains.

 

[audreyh1]

You will not pay taxes on a long term cap gains distribution from VWIAX for the same reason you won’t pay on the realized gain from selling it. The tax treatment is the same. How large is your unrealized gain in VWAIX? Is it over $10,000?

There is no benefit for waiting until after the cap gain is paid out. You don’t get anything extra from the cap gain. You won’t miss out by selling ahead of the distribution.

 

[Earl E Retyre]

You will not pay taxes on a long term cap gains distribution from VWIAX for the same reason you won’t pay on the realized gain from selling it. The tax treatment is the same. How large is your unrealized gain in VWAIX? Is it over $10,000?

There is no benefit for waiting until after the cap gain is paid out. You don’t get anything extra from the cap gain. You won’t miss out by selling ahead of the distribution.

Thanks Sunset and Audrey for your quick replies. I had read an article that I thought told me that the VWIAX distribution would be taxed as ordinary income. I must have misunderstood (or else the article was wrong).

To answer your question, the unrealized gain is $17k (so, yes, over $10k).

So, it sounds like, for this year, it does not matter if I sell. But next year, I believe that my income could go over $77400. In order to not have to pay gains next year on the distribution, I think it would make sense to sell VWIAX this year. I can take that money and buy VTI in taxable and avoid any capital gains next year. And in my nontaxable account I can sell VTI and buy VWIAX. So, I am holding the same funds but avoiding capital gains tax.

Do I get it? Agree with this plan?

 

[RunningBum]

https://personal.vanguard.com/us/insights/taxcenter/yearend-qualified-dividend-income-2017 tells you what % of the CGs are short-term, which would be taxed as ordinary income. For Wellesley, it's 0%, so it's all LTCG.

Are you trying for an ACA subsidy this year? If so, any capital gains from selling adds to your MAGI. If you aren't trying for a subsidy until next year, it makes a lot of sense to set yourself up this year for a subsidy next year. Index funds rarely have capital gains distributions. They do have dividends though. Perhaps less than Wellesley.

Note that you don't get unlimited 0% capital gains, and it's not AGI you look at. It's "Taxable Income", line 43 from 1040 last year. Subtract deductions and exemptions from AGI. Any CGs or QDivs that push above $77,400 will be taxed at 15%. Look at the Qualified Dividend and Capital Gain Tax worksheet for a better understanding.

Make sure you aren't selling any shares of Wellesley at a loss. If you're doing avg cost basis you probably won't, but FIFO or Spec ID could be at a loss for any recent shares. If you sell and then buy within 30 days in your IRA, it's a wash sale, so you can't take the loss on the sale of those shares, and it's gone forever since the shares are now in an IRA.

 

[audreyh1]

Right - the total income limit for 0% taxable LT cap gains is $77,400 + $24,000 standard deduction = $101,400 for MFJ.

 

[RunningBum]

Yeah, I guess I can stop talking about exemptions.

 

[donheff]

How about selling VWIAX and buying something like VTSAX in taxable and exchanging enough equities for bonds in a 401K to make up the difference in your AA.

 

[Earl E Retyre]

https://personal.vanguard.com/us/insights/taxcenter/yearend-qualified-dividend-income-2017 tells you what % of the CGs are short-term, which would be taxed as ordinary income. For Wellesley, it's 0%, so it's all LTCG.

Are you trying for an ACA subsidy this year? If so, any capital gains from selling adds to your MAGI. If you aren't trying for a subsidy until next year, it makes a lot of sense to set yourself up this year for a subsidy next year. Index funds rarely have capital gains distributions. They do have dividends though. Perhaps less than Wellesley.

Note that you don't get unlimited 0% capital gains, and it's not AGI you look at. It's "Taxable Income", line 43 from 1040 last year. Subtract deductions and exemptions from AGI. Any CGs or QDivs that push above $77,400 will be taxed at 15%. Look at the Qualified Dividend and Capital Gain Tax worksheet for a better understanding.

Make sure you aren't selling any shares of Wellesley at a loss. If you're doing avg cost basis you probably won't, but FIFO or Spec ID could be at a loss for any recent shares. If you sell and then buy within 30 days in your IRA, it's a wash sale, so you can't take the loss on the sale of those shares, and it's gone forever since the shares are now in an IRA.

Thanks for all this info. Yes, I am trying for an ACA subsidy this year. I should get it since my MAGI will be under $64,960. None of the Wellesley will be at a loss.

Right - the total income limit for 0% taxable LT cap gains is $77,400 + $24,000 standard deduction = $101,400 for MFJ.

So, this is even better than I thought. The number is really $101,400 and not $77,400 in order to pay 0% gains.

How about selling VWIAX and buying something like VTSAX in taxable and exchanging enough equities for bonds in a 401K to make up the difference in your AA.

Yes, that is another option. I think my main goal would be to get out of VWIAX in taxable so I am not potentially paying cap gains. Although, with the limit being $101,400, there is a good chance I will not exceed that. I could buy VWIAX in my tax free account or buy enough bonds to mimic VWIAX as you say. I am also thinking it might make sense to buy CDs instead of bonds - especially if 5 yr CD rates hit 4+%.

On a different (but related note) … I am also thinking I should start converting my traditional IRA to Roth as long as the gains do not cause me to exceed my ACA limit (nor my 0% cap gain limit). Then I will not have to worry about RMDs in the future. And I am guessing I am in a lower bracket now than I will be in the future. I suppose all this complication is why folks hire CPAs. But with all the help you all have given me, I think I could do the computations myself.

 

[audreyh1]

So even with a realized cap gain of $17,000, you’ll still be under the $64,960 MAGI limit?

 

[pb4uski]

Earl E.... what do you stimate your AGI will be before any year end distribution from Wellesley or any sales of Wellesley?

 

[TwoByFour]

I could buy VWIAX in my tax free account or buy enough bonds to mimic VWIAX as you say.

Personally I like having equities in a taxable account. It is a better tax situation for us to pay LTCG than to pay the tax on RMDs. Besides, it gives you a lot more flexibility.

Note that you would not have this problem with a big cap gains distribution from Vanguard with an all-market index fund like VTI. You would have qualified dividends though. They are averaging 1.8%.

 

[Earl E Retyre]

So even with a realized cap gain of $17,000, you’ll still be under the $64,960 MAGI limit?

Maybe I am confused. I thought I would not have an increase in MAGI since my realized gain is not taxed.

Earl E.... what do you estimate your AGI will be before any year end distribution from Wellesley or any sales of Wellesley?

I believe for this year my AGI will be $42k not including Capital Gains or any sale of Wellesley.

I was assuming that if I were to sell Wellesley and have a realized a gain of $17k then my AGI is still $42k since it is not taxed. And, I was assuming that the 3.9% Wellesley year end capital gain is not taxed - so again, AGI would still be $42k. Is that correct?

 

[RunningBum]

Maybe I am confused. I thought I would not have an increase in MAGI since my realized gain is not taxed.

As I said in post 5, CGs increase MAGI.

 

[RunningBum]

After the CG distribution, the price of Wellesley should drop accordingly. So if you have a $10K distribution, your $17K unrealized capital gain would drop to $7K. So in either case you've got the $42K you knew about, plus $17K (or $10K+7K). $59K, so still under, but not by much. Of course the base price could change in the next month.

 

[pb4uski]

Maybe I am confused. I thought I would not have an increase in MAGI since my realized gain is not taxed.

I believe for this year my AGI will be $42k not including Capital Gains or any sale of Wellesley.

I was assuming that if I were to sell Wellesley and have a realized a gain of $17k then my AGI is still $42k since it is not taxed. And, I was assuming that the 3.9% Wellesley year end capital gain is not taxed - so again, AGI would still be $42k. Is that correct?

No, that is not correct.. the CG distribution or LTCG on the sale will increase your AGI/MAGI... it is just that when tax rates are applied a 0% tax rate will be applied to that preferenced income.

I think what I would do is to sell Wellesley and realize the gain... that will put you at $59k of AGI/MAGI... under the $64k limit for ACA. You may want to wait until late December to make sure that the $42k and $17k are still good numbers because you don't want to go over the $64k.

You can reinvest the proceeds in Wellesley (no wash sale concern since it is a gain) or in other index funds.

 

[RunningBum]

I recommend doing a mock tax run using a tax program to understand this better. If you don't have this year's, use last year's, because the subsidy and capital gains treatment isn't really changed from last year other than threshold amounts.

Look at form 8962 for MAGI, and the QDivs and CGs worksheet I mentioned earlier to see how cap gains are treated. I spent a long time one day studying that and trying different numbers to understand just how it works.

As pb4 says, it's not really correct to say that CGs "aren't taxed". They are fully part of your taxable income, it's just that when you go to figure out your taxes owed, some or all of them may have a 0% tax rate.

Or just google something like "what is included in MAGI", which should give you a lot of hits. I like to figure things out looking at the actual tax forms to make sure.

 

[pb4uski]

Here is MAGI:

http://laborcenter.berkeley.edu/pdf/2013/MAGI_summary13.pdf

 

[audreyh1]

Maybe I am confused. I thought I would not have an increase in MAGI since my realized gain is not taxed.

Wrong!

I was worried that this was your thinking. Just because it's taxed at 0% doesn't mean that it doesn't appear as part of your MAGI. It certainly does!

I believe for this year my AGI will be $42k not including Capital Gains or any sale of Wellesley.

I was assuming that if I were to sell Wellesley and have a realized a gain of $17k then my AGI is still $42k since it is not taxed. And, I was assuming that the 3.9% Wellesley year end capital gain is not taxed - so again, AGI would still be $42k. Is that correct?

No, your MAGI will be $42K + $17K.

 

[Earl E Retyre]

Thanks all, for the excellent explanations. I am glad you were persistent and cleared up my confusion.

So, it looks like I should do what PB4 suggests and wait until late December, then likely sell all of Wellesley and realize the gain... that should put me at $59k for AGI/MAGI... which is under the $64k limit for ACA. And should result in a 0% tax cost on the gain resulting from the sale.

I will then buy VTI in my taxable account with the proceeds of the Wellesley sale so that next year I am more in control of capital gains. And so I minimize the amount that will hit my AGI/MAGI next year when it will be tight for me to meet ACA requirements. I can buy bonds or CDs in my tax efficient account to maintain the same AA.

 

[bizlady]

Right - the total income limit for 0% taxable LT cap gains is $77,400 + $24,000 standard deduction = $101,400 for MFJ.

I think the LT cap gains is actually 77200 + 24000 = 101200 for 2018. Quirk in the new law. I may be wrong but you might wan to double check this

 

[audreyh1]

I think the LT cap gains is actually 77200 + 24000 = 101200 for 2018. Quirk in the new law. I may be wrong but you might wan to double check this

I also thought it was $77,200, but then double checked and some site that I thought I had referenced before gave me the $77,400 number. Annoying!

Yes, I really think the $77,200 number is correct.

 

[audreyh1]

Thanks all, for the excellent explanations. I am glad you were persistent and cleared up my confusion.

So, it looks like I should do what PB4 suggests and wait until late December, then likely sell all of Wellesley and realize the gain... that should put me at $59k for AGI/MAGI... which is under the $64k limit for ACA. And should result in a 0% tax cost on the gain resulting from the sale.

I will then buy VTI in my taxable account with the proceeds of the Wellesley sale so that next year I am more in control of capital gains. And so I minimize the amount that will hit my AGI/MAGI next year when it will be tight for me to meet ACA requirements. I can buy bonds or CDs in my tax efficient account to maintain the same AA.

Your unrealized capital gain is changing every day, and reduces as the market sells off. It increases as the market rallies.

 

[pb4uski]

If when you get your numbers refined you can't fit it all in 2018 then you can do as much as you can in 2018 and the remainder in 2019.

And the TI limit for 0% capital gains for MFJ for 2018 is $72,200, not the $74,400 top of the 12% tax bracket.

If you are pretty sure of your numbers you might take advantage of a dip to do the flip from Wellesley to VTI... your gain will be lower but it'll give you more room for estimating error without going over the $64k cliff.

 

[DAYDREAMER]

Wellesley's large distribution this year has complicated people's financial plans. I'm re-evaluating if Wellesley is the correct fund to own in my taxable account. The other thing to consider is that only 33% of the dividends are qualified Dividends, and 66% of the dividends are taxed at ordinary income rate.