I have been using Pralana for about a week and I like it (coming over from MaxiFi). I have pretty much worked through all the screens and I am comfortable with my inputs and the results. However, one area remains kind of a "black box" to me: Growth Taxation. I have read the relevant user manual section and Bill Hines's excellent book (Plan your money path"). But even with all that information, I still fundamentally don't understand the percentage figures to be entered in each of the categories and what they represent. I understand that this pertains to growth. Growth of what? Portfolio? Dividends? Interest?, Taxation over time? Or ???
In my case, I have a 70:30 stock/bond portfolio. I think I understand the "Growth taxed as qualified Dividends" section. My 5-year dividend growth is 4% with a 5-year total nominal return of about 9%. According to Bill's book I divide the dividend growth% into the total return%. This results in 44%. But what is the math for the bonds and LTCG categories? How to allocate the remaining 56% over these 4 categories? Treasury bonds and Muni Bonds have a fixed interest. So where is the "Growth Taxed as Interest"? I am sure there is a good explanation for all this but I just can't see it.
Thanks so much for removing my mental block on this topic.
Here's what I do:
I look at last year's 1099 to get the qualified and non-qualified dividends as a percent of the average account value. Then I divide those by my projected nominal rate of return. So last year, our stocks had about 2% total dividends, 1.6% qualified and 0.4% non-qualified. So I divide each by my projected nominal rate of return for stocks (5% real + 3% inflation), giving me 1.6/8 = 20% qualified dividends taxed as capital gains, 0.4/8 = 5% non-qualified dividends taxed as ordinary income and the remaining 75% is taxed as capital gains when sold.
OK, Thanks. That works but I don't see a "non-qualified dividends taxed as ordinary income" category on my online version of Pralana.
And I still don't understand the bond categories.
Oops, non-qualified dividends are taxed as ordinary income. In the program, that's called growth Taxed as Interest.
For bonds, if you believe that all you are going to get is the coupon, then it's 100% Taxed as Interest. On my own numbers, I was slightly optimistic and said that since bonds have had poor returns since 2022, that maybe brighter days are ahead, so I said that only 80% of the return will be Taxed as Interest and 20% will be Taxed as LTCG when withdrawn.
On the bonds, I generally hold them through maturity so only taxable coupon payments. I ended up adjusting the percentages in the various categories to match the interest and dividend payments in my last year tax return. That gets me pretty close, I think. Still, this section in the program remains a bit of a mystery to me. Especially when it comes to the advanced portfolio. Perhaps the interface and/or the user manual could be improved. A few screenshots with examples would be helpful. Thanks very much for your replies. I appreciate it.
Yes, even just pre-populating some default numbers and telling people to tune to their last year's tax return would at least get folks started.
Just bought Online yesterday, no matter what I enter in Growth Taxation, I get the same number for 3a Qualified Dividends and 3b Ordinary Dividends. And my 2b taxable interest is way overstated. That has never been the case for my investment/tax returns. Obviously I am doing something wrong, any idea what?
Some kind of input in the wrong place, if you can't spot it yourself, the solution is to send the case to Charlie or Stuart.
@ricke Could I use the TTM yield found in morningstar instead of calculating total dividends/average account value? (Eg vtsax=1.26%)
I'm thinking for average user this is the easiest way, rather than needing to also figure the average portfolio value during the year. The whole thing is an approximation anyway.
Sure, that works. My 1099 for 2023 said all of the dividends for Vanguard Total Stock Market were Qualified (well 5% were Section 199A, I think that is a category that is also preferenced, just not quite as good as qualified). So you would enter 1.26/(projected real return + projected inflation) for the percentage taxed as LTCG, and enter the rest as taxed as LTCG when sold.
@ricke According to SmartAssets, the 199A dividends (REIT) are taxed at ordinary tax rates not qualified.
Thanks, I didn't know what those were, so I guess VTI is taxed as 95% LTCG and 5% taxed as interest income.
For the benefit of others holding the Vanguard total stock market, I looked at the last few years of qualified dividends from the Vanguard web site (link). Using their figures, dividends were 93.7% qualified over the last four years, leaving 6.3% of dividends as that were not qualified. (FWIW, 2024 is looking to have an atypically large 10% of dividends non-qualified! Hope that's not a trend.)
Using Morningstar's trailing twelve month (TTM) yield of 1.26% over the past 12 months (until I have better typical yield data), this comes to a breakdown of 1.18% qualified yield, 0.08% not qualified yield (i.e. ordinary dividends).
Using a somewhat low estimated nominal return for VTSAX of 6.5%, this comes out to growth taxation of ~18% of that qualified dividends, ~1% ordinary dividends, ~81% LTCG at time of sale. If I use more optimistic 7.5% estimated nominal return (based on a regression of returns with CAPE values), growth taxation would be ~16% qualified, ~1% ordinary dividends, ~83% LTGC at sale.
Is this roughly in tune with that others are using for taxation growth for taxable total stock market?
@jkandell my taxable portfolio is VTSAX and VTIAX, but when I look only at the VTSAX portion with your 6.5 ROR, my result is very similar. I only used the 2024 number for % qualified, so that explains the small variance I see. Thanks for posting this! It was helpful to have something to compare my approach with since I'm new with Pralana.
@jlee I'm glad you found it useful. Note the link in my post where you can find the % qualified dividend for any vanguard fund for any year; I've bookmarked it for future reference.
I also have VTIAX in taxable. And this exercise has made me realize this has been a mistake! I had heard it was tax-efficient to put international in taxable, and that doesn't seem correct.
The average % of dividends that were qualified over the last four years is 64.6% (vanguard 2021-2024 tax center data). That means that about 35% of dividends were not qualified, taxed as ordinary income.
The yield on VTIAX this past year has been 3.33% (per Morningstar). Assuming returns of 8% yearly return, that means that 27% of growth in a typical year will be taxed as qualified dividends, 15% as ordinary income (ouch!), with the remaining 58% or so of returns as long-term capital gains at time of sale.
