Tax Exempt Securities.

[aviator]

Hi Mark,

I own a few mutual funds that are tax-exempt, meaning that the distributed dividends are exempt from federal taxes. Within FM, I have the Investment Property set to Tax Free (under the Other tab in the Investment Properties window, the Tax Free box is checked).

One of my tax free mutual funds paid long-term and short-term capital gain distributions in 2015. FM treats *all* income from this fund as tax free; my broker treats the dividend portion as tax free but the LT and ST cap gains as taxable. I believe my broker is correct in that, from a taxation point of view, the capital gain distributions are indeed taxable even though the distributed dividends are not.

Is there a way to have FM report this separately? Today, I have FM setup so that each sub-portfolio is an account. Within the account, securities are either taxable or non-taxable as outlined in the first paragraph above. To see taxable vs. non-taxable income, I've linked securities in the main sub-portfolios to linked accounts, roughly broken down into taxable vs. non-taxable sub-portfolios.

Would appreciate your thoughts on how to make income reconciliation easier with my broker.

[Mark]

Hi aviator,

Fund Manager doesn't have the option to mark only certain types of distributions as tax-free and others as taxable within a given investment. It is either tax-free or not, and that applies to all distribution types. (It also applies to the Capital Gains report.) This is usually okay for an investment that is in a tax-exempt account, like an IRA, or a regular account.

What kind of investment/account is this that the dividends are tax-free, but the capital gain distributions are not?

[aviator]

What kind of investment/account is this that the dividends are tax-free, but the capital gain distributions are not?

It's Vanguard Long-Term Tax-Exempt Fund Admiral Shares (VWLUX). On 12/24/2015 it paid a short term and long term capital gain distribution that (Vanguard is showing) is taxable. However, monthly dividends from this fund are not. The account holding this investment is not an IRA, and it holds both taxable and non-taxable securities.

It's quite possible that Vanguard made a mistake but highly unlikely as I'm likely not the only one who's affected by this.

[Mark]

Hi aviator,

Thanks, I see. Looks like that fund invests in muni bonds that pay interest that is exempt from federal taxes. However, if they sell some bonds at a gain/loss those would be taxable (when not in an tax-free account), and show up as taxable capital gain distributions.

I'm confident Vanguard is correct in reporting things the way they do.

Maybe we can add another investment property something like "Income and Dividend Distributions are tax-free". This option would only be enabled when the overall "Tax-Free" option is not checked. This would give Fund Manager more flexibility in deciding which distributions to add into the Distribution Summary report.

[aviator]

Hi Mark,

As usual, thanks for your quick response and an even bigger thank you for making yourself available on a holiday. I'm using this three day weekend to get a jump start on my taxes and I appreciate your answering my questions so quickly.

You are indeed correct in that VWLUX invests in muni bonds. Looking at the history of this fund, they pay a cap gain every December. I can't tell if 2014's gains were taxable or not -- Vanguard's website doesn't go back that far for viewing taxable vs non-taxable income -- but I'm guessing it's no different than 2015 or how 2016 will be treated.

Thanks for considering adding another investment property, that would be very helpful. May I suggest you include Interest Income as well? (Perhaps that's what you meant when you wrote "Income and Dividend Distributions are tax-free".)

[Mark]

Hi aviator,

I was thinking of just 1 more option, that made both the "Interest" and "Dividend" type of distributions tax-free. This may need some more thought... Another approach could be to assign the tax status at the transaction level, which would give the most flexibility.

[aviator]

Hi Mark,

It seems to me that your latter option, to assign the tax status at the transaction level, would give users ultimate flexibility. Tax laws are ever-changing. For example, should Congress decide in the future that capital gains on muni funds are no longer taxable, users could then simply manipulate the transaction tax status to reflect the new tax laws. Just my (taxable) $.02...

Thank you for considering this.