When you set up your brokerage account as an After-Tax account, you may want to account for your dividends. Follow these steps to ensure plan accuracy.

(Dividends in tax deferred accounts such as 401ks and IRAs should be included in your growth rates for the account.)

  • You’ll need to know the answer to these 3 questions about your dividends to enter this information accurately.

    1. What is your annual dividend?

      • % yield if you are reinvesting your dividends

      • $ total dollar amount if you are taking your dividends as income

    2. What % of your dividends are qualified?

    3. Are you reinvesting dividends or withdrawing them as income?


There are 2 types of dividends - Non Qualified (Ordinary) and Qualified.

  • Non Qualified (Ordinary) Dividends are taxed at your ordinary income tax rate.

  • Qualified Dividends are taxed at preferential (lower) rates of 0%, 15% and 20% depending upon your total income. Qualified dividends are a subset of ordinary dividends.


Dividend Reinvestment: If you are reinvesting your dividends, they increase your cost basis. Increase your growth rates by the annual % of dividends you receive. If you’ve already included dividends in your total return, make sure not to double count them. For example, if you anticipate the account will grow at 4% and yield 1% of dividends, enter a growth assumption of 5%.

Then, add the same percentage of dividend growth to the "Turnover" rate. The "Turnover" rate will determine the percentage of the account to realize as long-term gains on an annual basis. If you are invested in passive index funds or ETFs, your "Turnover" percentage will be very low. If you are invested in active mutual funds, or are an active investor, your "Turnover" percentage may be higher. Add the dividend growth rate to the "Turnover" percentage. This will model a long-term gains tax liability rate for dividends each year. Building on the example above, if you assume a 0% "Turnover" rate without dividends and modeled 1% of divided growth, enter 1% as the turnover rate.


Dividend Income: If you are withdrawing your dividends as income, do not include the dividends in your growth or turnover rates.

  • Non Qualified (Ordinary) Dividends should be entered as My Plan > Income > Passive Income. The Planner will apply tax on this income stream at your ordinary income tax rate.

  • Qualified Dividends should be modeled in My Plan > Money Flows > Transfers. Enter a transfer from the After-Tax account to a savings account. The planner will apply tax at the appropriate long term capital gains rate based upon your total income as per the IRS tax code.

These areas will not 100% accurately reflect your taxes and we’ll be improving the dividend modeling in the near future. I recommend that you keep an eye on our feature updates if this is an important factor in your plan.


Calculations

How do you calculate your Dividend Yield?

You’ll find the annual dividends on your 1099 DIV and/or IRS Form 1040.

Divide the annual dividend dollar amount by the prior year-end account value to determine the annual percent.

Example: Dividends $3,000 ➗ $100,000 Account Value 3% Annual dividend yield


Where can you find your Ordinary Dividends?

IRS Form 1099 DIV box 1a contains both your non qualified (ordinary) and qualified dividends. Your non qualified (ordinary) dividends are (box 1a) minus (box 1b)

OR

IRS Form 1040 Line 3b details non qualified (ordinary) dividends


Where can you find your Qualified Dividends?

IRS Form 1099 DIV box 1b contains your qualified dividends.

OR

IRS Form 1040 Line 3a details qualified dividends.


EXAMPLE:

FORM 1099 DIV

BOX 1a $10,000 Qualified and Non Qualified (Ordinary) Dividends

BOX 1b $9,000 Qualified Dividends

(1a $10,000) - (1b $9,000) = $1,000 None Qualified (Ordinary) dividends


Why the confusion and circular calculation? It seems non-intuitive that you have to subtract out the qualified dividends. The reason that this is the case is that the total from box 1b is used in the calculation of your Total Income, which is used to determine your preferential Long Term Capital Gains and Qualified Dividend tax rate. Your ordinary income is taxed at one rate, and you Long Term Capital Gains and Qualified Dividends are taxed at another, preferential, rate. These rates are based upon your total income.

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