Since84
Moderator
To infinity and beyond!
Posts: 3,933
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Post by Since84 on Apr 12, 2019 4:15:14 GMT -8
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chinacat
Moderator
AAPL Long since 2006
Posts: 4,426
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Post by chinacat on Apr 12, 2019 5:59:39 GMT -8
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Post by macster on Apr 12, 2019 15:58:53 GMT -8
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Post by zzmac on Apr 12, 2019 21:27:10 GMT -8
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bud777
fire starter
Posts: 1,352
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Post by bud777 on Apr 13, 2019 5:31:32 GMT -8
I hope my brethren in the U.S. are enjoying a weekend free from the anxiety of last minute tax returns. For those who are not and for anyone else interested in the minutiae of the U.S. tax code, I wanted to share a minor point that I recently learned concerning taxation of dividends. I have absolutely no qualifications to give tax advice, so please read this as my (mis) understanding and confirm it yourself if it is relevant.
For years I have wondered about the difference between ordinary and qualified dividends. Since they are taxed at different rates, it seems advantageous to own stocks that pay qualified dividends. So what are qualified dividends and more importantly, are Apple dividends qualified? It turns out that most dividends, Apple included, are qualified. I won't go into the rules that make dividends ordinary, you can look that up easily enough, but here is the surprise. Qualified dividends become unqualified and therefore taxed as ordinary income if you hedge them. There are also requirements on how long you owned the stock before the dividends are paid. If you sell covered calls, for example, the dividends on the stock covering the calls are now taxed at ordinary income rates. I am not sure that brokers take the no hedging requirement into account on their 1099-DIV reports.
If we have any tax experts out there, I would appreciate your comments on this. Do I have it right?
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4aapl
Moderator
Posts: 3,622
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Post by 4aapl on Apr 13, 2019 17:16:54 GMT -8
No expert here, but I've had a few times where I've dipped deep into a specific area. While I haven't looked at that dividend area too deep in a while, that sounds about right.
Maybe 8-10 years ago I was using a lot of options spreads, and found similar things. In short (punny), the short side of it (or anything for that matter) doesn't get LTCG status. On the long side of the trade, it shouldn't get LTCG status either, since it was hedged or part of a straddle (where the tax code definition of a straddle is different than what is normally called a straddle in options terms). I filed this correctly, which meant that I lost out on some deductions I planned to have, though I forget the exact details now.
I believe that was the last year where you were self-reporting the sides of the options trade. The next year I had similar investments, but the brokerage reported the gains/loss. In this case, even though I would have seen it as a spread/hedging/aka straddle, they kept them separate, so the long side got LTCG status, and the short side was short term.
Looking for clarification elsewhere, it sounded like this was something that technically should be done one way, but is so complex that in practice it really wasn't done. As such, the general feeling was that unless making a ton from any difference, it was unlikely to be seen/found as a problem.
For me that year it mattered very little, and I decided it was both easier and more straightforward to just follow what the brokerage and then TurboTax said to do. It may be different if earning vastly larger gains, but I wasn't, and haven't been using many options for a while. It's your call on the dividends, but to me it makes sense to follow what your brokerage has already reported to the IRS.
Have fun with taxes! Even though for us this year's should be easier to do than some years, I'm just getting to them. Last year my neighbor encouraged me to file an extension, along with a payment of expected taxes. That gave us time to remember a few extra deductions (general or rental related). But that resulted in having to look at them at 2 different times, and only save $50 or so in extra things that we remembered ("ahhh, here's the $41 receipt for deck stain, and we made that $75 donation for the science program").
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4aapl
Moderator
Posts: 3,622
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Post by 4aapl on Apr 14, 2019 14:34:29 GMT -8
Ahhh, taxes. It's not taken that long to put it all into TurboTax....under 4 hours including a lunch break, ice cream break, and random other pauses like to post this and move a couch. It's the gathering stuff and procrastination that takes so long. I had done a year end analysis, and figured out that I was going to owe just a little less than I had already paid, before figuring in a change in medical subsidies that would make it owe it all back (strange tax thing where if you make $1 more than the level, you fall off the cliff). That was expected (Apple keeps raising their dividend ). But TurboTax said I owed a little more. I was curious so started looking around, and found my dividends to be a little more than my estimate. And that was because on my 1099-DIV, one dividend was from 1-31- 2019! It turns out that REIT's and RIC's have until the end of January to get the dividend to you. And guess what, SPY is a RIC. The 1099-DIV did this properly and everything, but some of these edge cases are always strange until, just like the way taxes are calculated on long options against an index (I forget if you have to hold them at least 30 days, but it's then considered something like 60% LTCG and 40% STCG...possibly even if you hold it longer than the standard 366 days needed for LTCG of normal options or securities). Fun with taxes. Jeopardy could have a field day with that.
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4aapl
Moderator
Posts: 3,622
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Post by 4aapl on Apr 15, 2019 6:52:20 GMT -8
Ok, one last tax/Turbotax thing, since it freaked me out and I was always curious about this area of Turbotax.
The review section found that I hadn't fully put all the details in one of our businesses, having both had ones a few years back and there hasn't been a reason to stop reporting them, while a couple computer purchases are fully depreciating so there's no recovery problems. TurboTax showed these areas to fill, but the review section wasn't letting me just go to that area, and it was limiting the text that it showed. So there were maybe 8-10 area that looked exactly the same, so I thought it wasn't taking my '0' entry, and I pushed '1' a couple times.
After that it went to the 'audit risk' area, where it put us as high, and on their meter it looked like it was in the 95-98% range. That's not exactly where I want to be.
Well, in printing I saw the '-$2' entry for business, and so went back and fixed it. This time, the 'audit risk' was low, maybe at the 2-5% mark if their thermometer means anything.
I've generally been pleased with TurboTax, having used it for almost 2 decades now. But I'm amazed that on an 'audit risk' section, which is sure to get people's blood pressure up, that a $2 difference (but no tax change) would make such a difference. Granted on the next page they are trying to sell you their audit protection services, but just like in the tax code, I wouldn't expect this falling-of-a-cliff type thing.
Good day all. For any rushed into finishing taxes today, remember that filing an extension is pretty easy and isn't a problem, as long as you pay anything you owe.
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Post by Apple II+ on Apr 15, 2019 7:11:26 GMT -8
Qualified dividends become unqualified and therefore taxed as ordinary income if you hedge them. There are also requirements on how long you owned the stock before the dividends are paid. If you sell covered calls, for example, the dividends on the stock covering the calls are now taxed at ordinary income rates. I am not sure that brokers take the no hedging requirement into account on their 1099-DIV reports. If we have any tax experts out there, I would appreciate your comments on this. Do I have it right? Not an expert, but there are “qualified covered calls” that don’t mess up qualified dividends.
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