Voluntary Federal Income Tax Withholding

artg

Good afternoon. I informed my investment company to voluntarily withhold Federal Income tax at a rate of fifteen percent (15%) on all distributions (Interest, Dividends, Short-Term Capital Gains and Long-Term Capital Gains.) The withhold I requested will take place on five (non-qualified) mutual funds. Three of the five funds make distributions monthly, one makes distributions quarterly and the fifth fund makes distributions annually (in December.) My question/goal/project is I'd like to track the withholding's in the Tax Planner as the year progresses. Does anyone have any experience with what I'm trying to do? (I don't mind having to make manual entries and currently the accounts I referenced are part of "One Step Update.")

NotACPA

Tax withholdings can NOT be recorded in your investment accounts in Q.

SO, record the full w/d in the investment account as a transfer to a banking account, split the deposit in the banking account and then record the Tax w/h as a negative amount in the split and Adjust the total amount of the transaction to reflect what you actually received.

q_lurker

I am going to break a personal rule and not confirm my answer before posting it.  

I believe for a regular (not tax-deferred) investment account, Quicken will use the transactions recorded in the account for all tax planning activities.  It is retirement accounts (tax deferred) which Quicken does not review or include in standard tax planning and reports.

IF that is the case (which I have not conformed), then you should be able to record MiscExp transactions directly in your investment accounts, categorize the transactions to an applicable category that is associated to a proper tax line, and have that information flow to the tax reports and tax planner.  If those transactions come through the OSU for that account, it may be a matter of editing the transactions to reflect the proper categories.  I believe there may be a couple of other transaction types that could be used (Write Checks or Withdraw Cash) come to mind.    

artg

@NotACPA and @q_lurker : First, thank you for your very quick response. I like both of your answers but here comes a big pause. Given, that I literally made the request yesterday the three funds that make monthly distributions (Dividends) will not happen for another three weeks. So, what I’m going to do is simply wait until the end of the month and see if my distributions are “gross” or “net” (after withholding.) Hypothetically speaking, let’s assume a $100 distribution. When I hit the “one step update” button will I only see $85 reinvested OR a $100 transaction with $85 reinvested? Now, if either of you have any experience/thoughts with how a typical mutual fund company will handle that transaction I look forward to hearing your experience.

q_lurker

Are the distributions made to you in cash -- direct to your checking account perhaps?  If so, is it one lump deposit or 'three' deposits from the three (monthly) funds?
Are the distributions reinvestments?
Are the distributions held in cash (or money market) until you dictate the next investment?
How have they reported reinvestments before?  Some do one ReinvDiv transaction, some do two transactions, a Div and a Buy Shares.  

As reinvestments (which you suggest), I would expect the MF to download three transactions to you - the gross (100%) dividend, the 85% Buy Shares, and a 15% cash-sent-out transaction.  That should be what you want to have end up in your Quicken register.  But they may also lump together the three monthly cash-sent-out transactions into one.  That would still be OK.  Basically, there is no 'standard' among the various fund families.  

I would suggest you enter three manual transactions now as a test case and make sure you are seeing the data flow you need, expect, and can use.  You've got time to try things first.  (Have a good backup available in case you don't like the results or something goes haywire.)  

NotACPA

What comes to your checking account will, almost certainly, be Net.

BUT, that doesn't get the taxes that were withheld recorded in Q it they come from a retirement type account.  My method does that.

And, I haven't tried @q_lurker's method either

artg

@NotACPA and @q_lurker : Thank you again but I obviously did not ask the question correctly upfront so please allow me to try again. I have a (non-qualified) mutual fund account with several different mutual funds. BEFORE yesterday, ALL distributions made by a particular fund were reinvested into that particular fund to buy more shares. Not a single penny went to my checking account. Based on 2019 results and my 2019 tax liability (from initial inputs to Turbotax) my goal a year from now is to receive 1099-Div forms with an amount (greater than $0) filled in Box 4 (Federal Income Tax Withheld.) I’ve chosen 15% of all distributions. Yesterday I put that request in writing to my mutual fund company for five different mutual funds I own. So, based on both of your collective responses I’m going to have to wait until the end of the month to see how this is really going to work. My goal was to keep this process as automated as possible (read as One Step Update) but it sounds like I may have to do some manual inputs. That’s certainly okay.

NotACPA

Elaborate upon what you mean by "(non-qualified) mutual fund account".

Is it a retirement type account (IRA, Rollover IRA, SEP IRA, 401k, etc.) OR is it a taxable account where those reinvested dividends are taxable in the year received in the account.

artg

@NotACPA : Thank you again for responding. The answer to your question is: TAXABLE in the year received in the account. Let me repeat please, the mutual funds I'm referring to each produce a IRS Form 1099-DIV. Based on 2019 results and my 2019 tax liability (from initial inputs to Turbotax) my goal a year from now is to receive those 1099-Div forms with an amount (greater than $0) filled in Box 4 (Federal Income Tax Withheld.) I’ve chosen to request my mutual fund company to withhold 15% of all distributions.

Jim_Harman

So if the gross distribution from the fund is $100, $85 will be reinvested in that same fund and $15 will be sent to the IRS, right?

This should be recorded in Quicken as $100 of dividend income, a Buy of $85 worth of shares, and $15 sent to the IRS. I think you need 3 transactions - Div, MiscExp (with Federal tax withholding as the Category), and Buy. Hopefully the downloaded transactions will match this..

artg

@Jim : Thanks for the response. Yes, you're correct, the hypothetical $15 goes to the IRS. Most importantly, it's sent by my mutual fund company (to the IRS) and they'll make it official next year in Box 4 of a 1099-Div. The interesting part of your answer will be determined the end of this month when I go through my first cycle of distributions with the mutual fund company withholding 15%. So, we'll see how this turns out in a few weeks.

Jim_Harman

Another and perhaps simpler way to avoid a large tax bill next year would be to go back to reinvesting the dividends in full and make quarterly estimated tax payments.

Or you could switch to receiving the dividends in cash, make the quarterly tax payments, and use any left-over cash to buy more of whatever is underweight in your asset allocation.

Either of these approaches lets you hold on to the cash longer. The last approach would result in fewer transactions and tax lots to keep track of.  

artg

@Jim_Harman :Thanks Jim but I already make quarterly estimated payments; the goal of the Voluntary Withholding is to actually lower the estimated payments. With that said, your idea of receiving the dividends in cash, make the quarterly tax payments, and use any left-over cash to buy more of whatever is underweight in your asset allocation deserves serious consideration.

Jim_Harman

[edited for clarity] Another portential benefit of taking the dividends in cash rather than reinvesting in a taxable account is that when you sell securities you run less risk of triggering the IRS wash sale rules.

artg

@Jim_Harman : Thanks Jim. You're absolutely correct.