077 - Learn How "Asset Location" Can Lower Your Tax Bill

Real Personal Finance

In this podcast episode, we have a listener question:

I just recently found your podcast when I was looking for some info on mega-backdoor roths. Thanks for all the info, you guys really are a wealth of knowledge. In an older episode, where you guys were talking about asset locations, one of you mentioned that if you have dividend-paying stocks, you should hold them in a retirement account, so you don't get messed up with paying taxes on the dividends. I have been of the understanding that investment dividends are taxed at long-term capital gains rates, so for MFJ, you would need to make over $80,000 in dividend income before you pay any taxes in 2020. If this is the case, and your dividend stock or fund paid 2% per year, you would have to hold $4,000,000 to reach that first 15% threshold. In this case, taxable accounts seem like a great place to hold dividend-paying stocks. Am I misunderstanding something about this?

Planning Points Discussed:

• Taxable Investments
• Taxation of Qualified Dividends and Ordinary Income
• Asset Location v. Asset Allocation
• Long-Term Capital Gains v. Short-Term Capital Gains
• Hierarchy of Assets

Key Points:

• How Various Taxes Impact Your Income
• • Tax Implications Example:
  • • Example: You make $100,000 a year and you contribute $10,000 to your 401(k) and take a standard deduction of $12,000. Your taxable income would be $90,000 and if $12,000 is the standard deduction, $78,000 would be taxable income.
    • There are two separate tax brackets for Ordinary Income & Long-Term Capital Gains(includes Qualified Dividends). If your ordinary income is under $80,000, any capital gains are taxed at 0%. Between $80,000 and $496,000, you are taxed at a rate of 15%, and above $496,000 you are taxed at 20% (assuming MFJ).
    • The listener is correct- if you have a $4,000,000 portfolio, received $0 in ordinary income, and dividends were below $80,000, you would be taxed at 0%.
    • If you make over $250,000 as a family, there is an additional 3.8% tax(Net Investment Income Tax).
    • Salary, Social Security, etc. are all taxed at Ordinary Income rates.

• Long-Term Capital Gains & Qualified vs. Ordinary Dividends
• • Qualified vs. Ordinary Dividends
  • • When you receive a dividend, a company is making money and deciding to return some of that money back to the stockholders.
    • If you hold a dividend for 60 days, it would be a qualified dividend. If not, it would be an ordinary dividend taxed at ordinary income tax rate