Trying to understand difference between the terms "long-term capital gains (LTCG) that are taxed each year" vs "LTCG taxed only when withdrawn"? Any example is most appreciated. I've Googled trying to find difference and keep coming up empty handed.
@mgarbm "LTCG that are taxed each year" are the gains from the sale of equities within a stock mutual fund (controlled by the fund manager) and the "LTCG taxed only when withdrawn" are the LTCG portion of appreciated assets sold to cover negative cash flows. Does that make sense?
Stuart
Yes completely, thank you Stu. I did see it in the pop out information under Growth taxation.
So you should be able to look at the dividend yield for your fund or look at a 1099 to get the information. Any Qualified Dividends you receive belong in the category of long term capital gains each year. Any Non-qualified dividends (IRS calls it Ordinary Dividends minus Qualified Dividends) belong as part of taxed as interest each year.
The tricky bit is the percentages that the program is looking for are percentages of your total nominal return (real return + inflation). So if you expect 5% real return and 3% inflation, your total real return is 8%. The example I like to share is that my Qualified Dividends amount to about 1.6% per year and my Non-Qualified dividends are 0.4%. So I fill the table out as 0.4/8 = 5% taxed as Interest (Non Qualified dividends are taxed as ordinary income, the same way interest is), 1.6/8 = 20% taxed as LTCG each year (Qualified Dividends are taxed the same as LTCGs) and the remaining 75% taxed as LTCG when withdrawn.
@ricke Thank you, as I think I understand your explanation thoroughly. I plan on receiving my 2024 1099 this weekend and will reference a few past years 1099's and run the numbers to see they look.
@mgarbm If you own Vanguard funds, I recently calculated the average four year average Qualified %s for Total Stock Market, Small Value, Mid-cap value, and Lifestrategy-Moderate, if any of those are helpful to you.
@jkandell I own VTI which is total market ETF. Thanks
I can't message you directly in this forum, so hope it's not noise to post it here:
| 93.7% | avg | ||
| 2024 | 2023 | 2022 | 2021 |
| 90.92% | 94.68% | 93.79% | 95.43% |
Qualified dividend %s last four years. With 1.22% dividends for the fund, that's 1.14% qualified and .08% not-qualified. So it's just a matter of using those as the numerators over your expected nominal annual return for VTI. In my case I assume 6.5% return, so used 17.5% qualified dividend growth and 1.2% interest income growth for vti taxation. If your most optimistic than I about overall returns, you'd use 15% QDs and 1% interest income in the growth taxation entries. Either one should be "good enough" to reflect your long term taxation haircut.
Is the qual div 1.6% of the total account value? My latest 1099 has ordinary divs @ $5133, qualified @$2190, non qualified being difference I think. Might this info be able to allow quick estimate of simple portfolio growth taxation rate?
Yes, in my example, the 1.6% is the percentage of the account value. If you are unsure of the account value to use or didn't hold the investment for the entire year , then you can look up the current dividend yield as an approximation of your total dividend and then use your actual experience as an estimate on the split between Qualified (which Pralana calls taxed as LTCG each year) and Non Qualified (which Pralana calls taxed as interest each year).
Note that ratio of 2190/5133 as qualified dividends doesn't sound very tax efficient, perhaps you are holding bonds or a balanced fund that holds bonds in your taxable account. You want to hold as many of your bonds in your tax deferred accounts as possible. That way, the taxation of bond dividends as ordinary income matches the the taxation of the account type and you reserve as much space in taxable and Roth for stocks that are mostly taxed as LTCGs. You model the preferential placement of bonds in tax deferred in Pralana with Advanced Portfolio Modeling - Mode 2.
@ricke Fidelity reports interest on their MM funds as dividends. I had a CD mature last year and parked it in their MM fund thus the tax inefficiency.
