Sunday, December 21, 2014

Help Needed ETF Picking: Tax Implications / Discussion

Over at we came across the following discussion: 

Help Needed ETF Picking: Tax Implications

Postby HumbleInvestor09 » Sat Dec 20, 2014 12:58 am
Hello all,

I am new to the forum and have enjoyed learning. I have been convinced that indexing is the way to go. I'm 28 yo, income currently 80-90k/yr, saving approx 50% of income. Pretty naive when it comes to investing.

I currently have about 100k in retirement accounts (IRA) and about 100k in a taxable investment account. In an ideal world, after reading this forum, I'd like to allocate with a "3 fund" portfolio at 80/20 stocks to bonds. Perhaps something like 60% VTI, 20% VXUS, 20% BND. My retirement accounts now match very closely with this allocation (although I can change if I should!)

This is the problem: I made some investments along the way in my earlier years in the taxable account that are currently carrying sizable unrealized capital gains.

I have VV (Vanguard Large Cap) Market Value: 45k, Unrealized Gain 20k
I have IJH (Ishares Mid Cap) Market Value: 6.5k Unrealized Gain 3k
I have IJR (Ishares Small Cap) Market Value: 6.5k Unrealized Gain 3k

I feel like it would be quite dumb for me to sell these instruments, have to pay 4-5k in taxes now, and then reinvest in similar instruments to get my desired "3-fund" portfolio. Does anyone have any suggestions for how to build a portfolio that matches the allocation I am looking for without having to realize the gains on these products? Are the Ishares ETFs quite bad, to the point of which I should dispose of them despite the gains?

Thanks in Advance!
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Joined: Sat Dec 20, 2014 12:26 am

Re: Help Needed ETF Picking: Tax Implications

Postby livesoft » Sat Dec 20, 2014 7:40 am
I would just keep the investments you have unless they really bother you. Here are some things one can do:

1. Do not automatically reinvest dividends on your existing ETFs.
2. Do not buy more of your existing ETFs.
3. Start your new phase of VTI, VXUS, BND.
4. Consider that your VV, IJH, IJR shares are equivalent to same dollar amount of VTI ($58K) in your asset allocation. I don't think you need to be more precise than that.
5. In the future, if you feel you must get rid of VV, IJH, and IJR, then you may have opportunities to do so without paying taxes on them:
a. You may need to tax-loss harvest VTI and VXUS in taxable. That means selling for a loss and buying replacement shares. You can sell shares with gains to offset the losses.
b. (Sorry Gill) One can donate appreciated shares held longer than a year to charity and take a tax deduction on Schedule A if one itemizes. If you are one to make charitable contributions, then consider this. You may also wish to read up about Donor-Advised Funds.
c. If you have children that pay a lower tax rate than you, then you can give them appreciated shares which they can sell. Sometimes their long-term capital gains are tax-free.

You may find that when you have to tax-loss harvest that you will end up with other ETFs anyways. For instance, I tax-loss harvested Total Stock Market Index in 2009 and bought the Large-cap Index which I hold to this day. Many folks sold VXUS for a loss recently and bought VEU.

I think that it would be rare for a taxable account more than 5 years old to have only one fund for each asset class. In the future, with roboadvisors like Betterment, folks may end up with 3 different ETFs for the same asset class.
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Re: Help Needed ETF Picking: Tax Implications

Postby jimkinny » Sat Dec 20, 2014 8:10 am
At one time I wanted perfection but eventually realized that most of this stuff is pretty trivial. It looks to me like you got the important stuff nailed. I would not do anything.

I would simply count the large,mid and small as a close enough equivalent to VTI to just count it as such. You can find on the Wiki, or morningstar style box, what % of large, mid and small VTI has but it is close enough in light of cap gains that I would keep things as is and not sell.

Maybe we will be unfortunate in the next several years and those gains will turn to losses or maybe the gains will be lower.

I have all of my fund distributions going into a MM account to make life simple and avoid wash rules when harvesting a cap loss so I think it is generally a good approach to do this.

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Re: Help Needed ETF Picking: Tax Implications

Postby Epsilon Delta » Sat Dec 20, 2014 11:34 am
livesoft wrote:5. In the future, if you feel you must get rid of VV, IJH, and IJR, then you may have opportunities to do so without paying taxes on them:

d. If you are (or get) married and family income stays at the 90k level you may have a few thousand of 0% capital gains tax.
e. You may have a low income year (return to school, working for a startup, unemployment, ...) that gives you the chance to realize gains at 0%.
f. There are probably others. IIRC there's a corner case with AMT.

Sitting tight until or unless you get such an opportunity is reasonable.
Posted on 6:56 AM | Categories:

Xero prepares for key feature coming in 2015

Daniel James for BIT Australia writes:  Xero users will be able to track how their business is comparing to other Xero users.

The changes include a revised dashboard, which is a stepping stone to a major change coming in early 2015 that will show how the business is tracking compared to other Xero users.
The current updates include a new graph showing cashflow for the last few months, inclusion of all outstanding (not just overdue) items in the invoice and bill graphs, and the ability to rearrange the dashboard and remove any unwanted items.
"Key reports" including balance sheet and profit and loss now allow drill-down to the underlying numbers - something that's been possible in desktop accounting systems for years.
Repeating journals (eg, to apportion annual charges across each month) are now supported, along with more granular bank rules (which determine how transactions are automatically coded), and provision for dynamic placeholders in recurring transactions (eg, so that the description field can include the month of the invoice, as in "January membership fee"), and a mechanism that reduces the risk of accidentally creating duplicate contacts.
Xero has benefited from more than 400 improvements and new features during 2014, according to the company.
Posted on 6:51 AM | Categories:

Your Driving Deductions for 2015 / Tax Break for Work-Related Use of a Car Will Improve Next Year

Tom Herman for the Wall St Journal writes:  If you use your car for work, you may be eligible for a tax break that will be slightly more generous in the new year.

You may also qualify for a deduction if you use your vehicle to help a charity, or for medical or moving purposes. But be sure to read the fine print. As with so many tax laws, this one can be tricky.

Most taxpayers have a choice: They can deduct certain actual expenses of operating a vehicle, or they can use standard mileage rates published by the Internal Revenue Service. In addition to using the standard rate, they can deduct “any business-related parking fees and tolls,” the IRS says in Publication 17. But “parking fees you pay to park your car at your place of work are nondeductible commuting expenses.” 

Most people use the standard rate, because it’s easier. But don’t make your choice without considering whether you would be better off deducting actual expenses. For many drivers, that’s a better choice.

Here are the recently announced optional standard mileage rates, starting Jan. 1, 2015, for use of a car, van, pickup or panel truck:

For business miles driven, the rate increases to 57.5 cents a mile, up from 56 cents in 2014.
For medical or moving purposes, the rate will be 23 cents a mile, down half a cent from this year.

For charitable purposes, the rate will be 14 cents a mile, unchanged from this year.
The IRS said its standard mileage rate for business is based on “an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas and oil.” The rate for medical and moving expenses, which will decline slightly next year, is based on “the variable costs, such as gas and oil.” The charitable rate, which won’t change, is set by statute.

For more details, including what actual expenses may be deductible, see IRS Publication 17. Actual car expenses include such items as depreciation, licenses, gas, oil, insurance, and garage rent, the publication says.
Posted on 6:47 AM | Categories:

Saturday, December 20, 2014

Intuit Sets New 52-Week High at $95.83 (INTU)

Shares of Intuit (NASDAQ:INTU) hit a new 52-week high on Friday. The company traded as high as $95.83 and last traded at $94.71, with a volume of 1,932,333 shares. The stock had previously closed at $94.48.
Posted on 7:51 AM | Categories:

The 50% Bonus Depreciation Rule is Back for 2014!

Tom Copeland for the writes: A law just passed by Congress has revived the 50% bonus depreciation rule for 2014!
This rule had expired as of the end of 2013, but is now back.
This revived rule applies to the following items:
        Computer, office equipment, fence, furniture, appliances, patio, car/truck, and playground equipment. It does not apply to home improvements or a home.
The law allows you to deduct 50% of the business portion of these items in 2014, and depreciate the remaining 50% using the normal rules of depreciation.
To be eligible for this rule, the item you purchase must be new. Computers, cars, and televisions must be used at least 50% of the time in your business for them to be eligible for this rule.
Here's an example of how the 50% rule works. Let's say you buy a fence in 2014 for $1,000 and your Time-Space Percentage was 40%. Your business portion would be $400. Normally you would depreciate the $400 over 15 years (as a land improvement). But the 50% depreciation rule allows you to deduct 50% of the amount, or $200 ($400 x 50%). You would depreciate the other $200 over 15 years. Your 2014 deduction on the second $200 would be $10 ($200 x 5% = $10 first year of fifteen year depreciation) for a total deduction of $210. 
Without this new rule, you would have to depreciate the full $400 over 15 years: $400 x 5% = $20 deduction for 2014.
Should you purchase items before the end of the year to take advantage of this rule?
If you were planning to buy any of these eligible items in the near future, you will get a bigger tax break if you buy them in 2014. This is because the rule has not been extended to 2015.
Although this is a nice tax break, do not use this rule as an excuse to buy stuff for your business that you don't need! Never buy something just to get a tax break. Your taxes will never go down the same amount as the cost of the item.
In other words, in the above example, even if your fence was used 100% for your business you will still get a tax deduction of only $525 ($1,000 x 100% business use = $1,000 x 50% = $500 + $25). If you were in a very high tax bracket, your taxes would only go down by about $250.
I've written more about this in my article, "It's Deductible! Why Shouldn't I Buy it?"
State Income Taxes
Some states do not follow this 50% rule and deny child care providers this deduction on their state tax return. They may require you to report as income on your state tax return some of the amount you deducted using this rule. Check with your state department of revenue or your tax professional.
The 50% bonus depreciation rule has come, gone and come back again. To keep on top of these tax changes, keep following my blog.
Tom Copeland -
Posted on 7:50 AM | Categories:

Wave Accounting: An Early Review

I always get a little nuts this time of year, nuts in a good way, in a “I am going to OWN next year” kind of way. I revisit my goals for the existing year and assess my success. I analyze how I can be and do better next year, not just as a writer, but as a business owner (because, you know, writing is a business). I take a close look at how I’m managing finances and at my overall systems, not only for money (expense receipts, invoices, and the like) but also for communication and task management.
As I started the process of assessing 2014, I realized that I really needed to get some new systems in place before 2015 rings in. My accounting system, in particular, needed an overhaul; it was scattered and inefficient. By drawing up original invoices every time I needed to bill a client, I was wasting a lot of time. And by doing this in Word or Excel and simply storing invoices in a folder on my desktop, I was creating extra and unnecessary work for myself with respect to tracking payments.
I started talking with colleagues, asking them what systems or software they are using. Some said Quickbooks or Freshbooks; others sang the praises of Harvest. I took a quick look at each of these, but was discouraged by the fee-based structures. I’m always looking for ways to trim my expenses, not add to them, so despite the glowing recommendations for some of these services, I was more inclined to look at free apps. Sure, I could try Quickbooks or Freshbooks free for two weeks or a month, but did I really want to go through the hassle of setting up accounts, inputting my financial information, and then shutting down the accounts in a few weeks? Instead, I decided to set up a new system on Wave, a free service.
It took about 30 minutes to establish an account and link several of my bank and credit card accounts to Wave. The interface was fairly easy to use, though I had difficulty with one bank account, and it was clean and uncluttered, too. The dashboard is a one-stop-shop for useful information.
I set up the invoicing system right away, as that was my primary reason for signing up for a Wave account. Creating an invoice is easy enough, but I wish the “Memo” section was offered in the default template as opposed to the customized one. When attempting to edit the invoice, the system got hung up and I had to refresh the page, which cleared the invoice, requiring me to start all over again. I’m also not thrilled about receiving daily (so far) emails from Wave informing me about features or services that I could be taking advantage of; perhaps I need to play around with my settings to turn these emails off.
I’m a little bit concerned about having all of my accounting information in the cloud rather than on my own desktop, but overall, I’m happy with the service. Wave tracks what I’d rather not, which is whether invoices have been paid, and has helped me to create a standardized system for billing clients. There was widespread agreement among friends that each accounting program has its pros and cons, and if the choice is between a paid service and a free one, I’ll take the latter.
Posted on 7:30 AM | Categories:

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