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input numbers for TAXATION OF ASSETS IN REGULAR INVESTMENT ACCOUNTS

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Last Post by Wolfram Volpi 3 years ago

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Wolfram Volpi

(@wolfv)

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Topic starter May 20, 2023 2:19 pm

I have some questions about my input numbers for PRC's TAXATION OF ASSETS IN REGULAR INVESTMENT ACCOUNTS table (screenshot attached).

Some of the historic data for calculating the taxation-input numbers came from Vanguard's "Statutory Prospectus".
The historic data in the prospectuses goes back only 5 years.
I suspect that averaging 5 years is nonsense due to the small sample size.

Do the numbers in the attached screenshot look reasonable?
For example, "Growth Taxed as LTCG When Withdrawn" (unrealized capital gains) for bonds is 0%.
The actual calculation was -1.31%, but Excel said, "Must be a percentage between 0 and 100%".

I'm concerned about garbage-in, garbage-out.
How many years of data do I need to get a reliable average?
Where do other PRC-Vanguard users find data for their taxation-input calculations?

I'm using PRC2023 GOLD v3.1 and asset-allocation mode 2.
PRC > FINANCIAL ASSETS > Management > "User Specifies Overall Asset Allocation and Target Asset Location"
The attached spreadsheet shows my taxation-input calculations in two sheets.

1. historic_Qdiv_&_LTCG sheet
For each fund, numbers were copied from 3 sources:
- Vanguard's "Statutory Prospectus" (5 most recent years)
- https://investor.vanguard.com/investor-resources-education/taxes/qdi-yearend-qualified-dividend-income-2022 and previous years
- https://investor.vanguard.com/investment-products/mutual-funds/profile/vbtlx#performance-fees > Annually > Capital return by NAV
Then the years were averaged.

2. asset_class_taxation sheet
Averaged numbers from historic_Qdiv_&_LTCG sheet were used to calculate the TAXATION OF ASSETS IN REGULAR INVESTMENTS ACCOUNTS as described in PRC manual p50 > "Guidance for Determining the Numbers to Put in the Taxation Table".

Attachment : PRC_2023_taxation_inputs.ods

Attachment : screenshot_TAXATION_OF_ASSETS_IN_REGULAR_INVESTMENT_ACCOUNTS.png

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Bill Hines, Advice-Only Flat-F...

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May 26, 2023 10:12 am

This is a tough one as far as bonds are concerned, at least if you're in bond *funds*. If you're just buying regular bonds yourself, ok, it's easier - all gains are just simple interest taxed as income. But with bond funds, the only gain taxed as regular income are the dividend payments, which are fundamentally interest. So that first box should be whatever your bond yield is per year, even if you're reinvesting those dividends. VGIT (Vanguard Intermediate Term Treasury) is currently 3.6% SEC yield.

When you sell bond fund shares in a brokerage, it's just like selling equity shares - LTCG rates if you've held the shares longer than a year. If held less than a year, regular income. Assuming held longer than a year, the other 96.4% should be "Growth taxed as LTCG when withdrawn" in that case.

Yes, there is usually some "Growth taxed annually as qualified dividends due to trading/churn within the funds, but it's almost nothing.

Anyone doing anything different here? It does depend on what types of bonds you have. Aggregate bonds funds have higher yield, for example. Muni yields not taxed at the federal (and perhaps state) level at all, other than MAGI calcs.

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Wolfram Volpi

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Topic starter June 1, 2023 8:21 am

Thank you Bill. All my taxable bonds are in Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX).

My understanding is that PRC's Bond "Growth taxed as simple interest" column is a percentage of total bond growth (not a straight bond yield). All the "bond" columns are a percentage of total bond growth. And the "stock" columns are all a percentage of total stock growth.

From the formulas listed in 2023 PRC Gold Manual > “Asset Class Taxation” on page 51:

Armed with this information, we can start filling in the taxation table:
* Interest % for the taxable bonds class = TB(i) / TB (Total)
* Realized CG % for the taxable bonds class = TB(Qdiv) / TB (Total)
* Unrealized CG % for the taxable bonds class = TB(UCG)/ TB (Total)

There are two things on page 51 that I don't understand.

No formula is listed for the "Growth Taxed Annually as Qualified Dividends" column.
Would this formula be correct?:
Qualified Dividends % for the taxable bonds class = TB(Qdiv) / TB (Total)
Why does the formula for the "Growth Taxed Annually as LTCG" column use TB(Qdiv)?
Realized CG % for the taxable bonds class = TB(Qdiv) / TB (Total)
Would this alternative formula be correct?:
Realized CG % for the taxable bonds class = TB(RCG) / TB (Total)

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Richard Eaton

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June 4, 2023 10:39 am

@wolfv

I think Pralana asks for Qualified Dividends in the Realized Capital Gains formula because it intends to calculate realized LTCGs during retirement as you sell assets and draw down your portfolio. So it wants QDivs to add to its calculation of realized LTCGs.

That is fine for ETFs or individual stocks that aren't sold, but if you churn stocks or hold mutual funds, you can also have realized capital gains even if you aren't spending from your portfolio. Such gains should be included in the Simple Interest or Qualified Dividends categories depending on whether they were short term or long term gains.

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Wolfram Volpi

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Topic starter June 16, 2023 11:16 pm

Posted by: @ricke

↑

@wolfv

I think Pralana asks for Qualified Dividends in the Realized Capital Gains formula because it intends to calculate realized LTCGs during retirement as you sell assets and draw down your portfolio. So it wants QDivs to add to its calculation of realized LTCGs.

Pralana could get Qualified Dividends from the "Growth Taxed Annually as Qualified Dividends" column.

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Wolfram Volpi

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Topic starter June 16, 2023 11:21 pm

2023 PRC Gold Manual > “Asset Class Taxation” on page 51 is missing a formula for the "Growth Taxed Annually as Qualified Dividends" column. I guessed the formula is:

* Qualified Dividends % for the taxable bonds class = TB(Qdiv) / TB (Total)

But that's the formula listed for the "Growth Taxed Annually as LTCG" column. From the formulas listed on page 51:

Armed with this information, we can start filling in the taxation table:
.
.
* Realized CG % for the taxable bonds class = TB(Qdiv) / TB (Total)

So what is the correct formula for the "Growth Taxed Annually as Qualified Dividends" column?

This post was modified 3 years ago by Wolfram Volpi

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Richard Eaton

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June 17, 2023 8:29 pm

@wolfv

Qualified dividends and LTCGs are taxed the same, except that LTCGs are written off against prior losses if you have them, whereas QDivs are not. Just look at a prior year's tax return and see if you have any capital gains distributions, they may be marked CGD on the tax form. I think last year 1% of all my QDivs+CGDs were CGDs

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Wolfram Volpi

(@wolfv)

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Topic starter June 19, 2023 3:29 pm

From the 2023 PRC Gold Manual > “Asset Class Taxation” on page 51:

Armed with this information, we can start filling in the taxation table:
.
.
* Realized CG % for the stocks class = S(Qdiv) / Stocks (Total)
* Realized CG % for the taxable bonds class = TB(Qdiv) / TB (Total)

Then "TB(Qdiv) / TB (Total)" is calculated and entered into the "GROWTH TAXED ANNUALLY AS LTCG" column.

In my head, "GROWTH TAXED ANNUALLY AS QUALIFIED DIVIDENDS" would be a more descriptive heading for "TB(Qdiv) / TB (Total)".

Why is the "GROWTH TAXED ANNUALLY AS LTCG" column not labeled "GROWTH TAXED ANNUALLY AS QUALIFIED DIVIDENDS"?
This might be due to
- an unfortunate artifact of the convoluted US tax code
- the column heading was abbreviated to fit in the cell and thereby lost meaning
- a typo in the PRC manual
- or something else

This post was modified 3 years ago by Wolfram Volpi

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