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

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