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"TAXATION OF ASSETS IN REGULAR INVESTMENT ACCOUNTS" table

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Last Post by Bill Hines, Advice-Only Flat-F... 4 years ago

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Wolfram Volpi

(@wolfv)

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Topic starter August 23, 2022 3:55 pm

This puzzles me.

Why does PRC's "TAXATION OF ASSETS IN REGULAR INVESTMENT ACCOUNTS" table have a "Growth taxed as simple interest" column but does not have "Growth taxed as non-qualified dividends" nor "Growth taxed as short-term capital gains" column?

From PRC2022-Gold-Users-Manual.v5 page 49:
"Simple interest, non-qualified dividends or short-term capital gains, all of which are taxed as ordinary income"

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TAXATION OF ASSETS IN REG

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

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September 6, 2022 11:13 am

Hi Wolfram, it's because short-term capital gains and non qualified dividends are always taxed as ordinary income.

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Wolfram Volpi

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Topic starter September 10, 2022 12:06 am

Thank you for your answer. It helped me get a little closer to understanding.

From page 51 of PRC manual, Guidance for Determining the Numbers to Put in the Taxation Table:

.. growth of this account can be partitioned into one of four categories: 1) interest or non-qualified dividends, 2) ..

.. determine the specific dollar amount of interest and NQ dividends, ..

The example formulas that follow on page 51 do not include non-qualified dividends.

What is the purpose of "determining the specific dollar amount of NQ dividends"?
Should non-qualified dividends be included in the "Growth taxed as simple interest" column?

This probably makes sense in the context of US tax code, but I don't understand enough US tax code.

Are these statements correct?

"Growth" means principal or capital appreciation.
Capital gains is a kind of growth.
Interest and dividends are not a kind of growth.
Simple interest can be taxed as ordinary income or be tax-exempt e.g. municipal bonds.
Non-qualified dividends and short-term capital gains are always taxed as ordinary income.

Here is where I get confused:

Growth can be taxed as simple interest even though interest is not growth.
Growth can be taxed as qualified dividends even though dividends are not a kind of growth.

What am I missing?

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Stuart Matthews

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September 12, 2022 10:56 am

@wolfv Regarding "What is the purpose of determining the specific dollar amount of NQ dividends?" and "Should non-qualified dividends be included in the growth taxed as simple interest column?", you need the dollar amounts of each type of investment to determine the percentages for the FA > Taxation table. Yes, as far as PRC is concerned there's no difference between simple interest and non-qualified dividends. So, to keep the column header fairly short, non-qualified dividends is omitted.

Your other statement aren't all true. Growth in PRC means ALL forms of growth, which includes interest and dividends. In PRC, simple interest is always taxed as ordinary income; it is never tax-exempt. The table on the FA > Taxation page contains a separate column for tax-exempt growth/interest.

So, to summarize what you're missing:

Interest and dividends are considered growth regardless of any other considerations. If the return on a given account is 5%, then that 5% has to be decomposed into its component parts in order to compute the taxes. Those component parts are always either 1) simple interest and NQ dividends, 2) QD, 3) growth taxed annually as LTCG, 4) capital appreciation which is taxed as LTCH when withdrawn, or 5) tax-exempt.

Stuart

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Wolfram Volpi

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Topic starter September 22, 2022 4:31 am

Posted by: @smatthews51

as far as PRC is concerned there's no difference between simple interest and non-qualified dividends. So, to keep the column header fairly short, non-qualified dividends is omitted.

Thanks for clarifying. Less confusing would be a short header using abbreviations with the abbreviations explained in the manual.

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

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September 28, 2022 9:53 am

@wolfv short-term capital gains vs long-term can make this 'growth' thing confusing. Here's an example. If I buy shares of a stock in a brokerage account, and the share value *grows* over say 9 months, then I sell them for a profit, that 'growth' is taxed as income, as I did not hold the shares for a year so they are short-term capital gains.

The growth/profit taxed just like ordinary interest or dividends. If I had held the shares for over a year, the 'growth/profit' would be taxed as long-term capital gains, and subject to those tax tables (which are more favorable) and not the income tax tables. Aren't taxes in the US fun?

This post was modified 4 years ago by Bill Hines, Advice-Only Flat-Fee Investment Advisor, Tax/Financial Planner

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