Tax Issues

Sogoinvest did not classify qualified dividends

Last year, I invested in a few ETFs using Sogoinvest and these ETFs had some income dividends distributions.

After I received the 1099DIV form from Sogoinvest, I noticed that all the dividends are classified as ordinary dividends, none of them are classified as qualified dividends. Also, for my VWO (Vanguard Emerging Market ETF) holding, the foreign taxes paid are not declared in the 1099DIV form. I know these are incorrect because the same ETF holdings held at Ameritrade had qualified dividends and foreign taxes paid declared in the 1099DIV form.

These incorrect figures are not good for me or investors in general because the tax rate for a qualified dividend distribution is typically only 15%, whereas the tax rate for an unqualified dividend can run as high as 35%. In addition, any foreign taxes paid by the fund can be claimed back as a credit in the tax return, dollar-for-dollar.

I requested Sogoinvest through their secure message system to issue me an updated 1099DIV. Here’s their “canned” reply:

We will look into this, the 1099 statements reflect what the IRS gave to us. So we will look into this and get it corrected if it needs to be as soon as possible.

Huh? I thought it is Sogoinvest who reports the dividend information to the IRS instead of the other way round? Anyway, I did not try to argue with them on this point.

I was not hopeful that I would get an updated 1099DIV on time, but there is nothing much I could do but to wait for an update. I also sent them a reminder some time after my original request. Then came April 14, but nothing. In the end, I filed my taxes without an updated 1099DIV, paying more in taxes than I actually need to. By my estimate, I probably paid about $50 more in taxes because of the inaccuracies in the 1099DIV form generated by Sogoinvest.

I do not know if this is an isolated case of an incorrect 1099DIV form, but if the qualified dividends and foreign taxes paid are generally not reported by Sogoinvest, then it will be a very big turn-off indeed.

Related links [1] [2] [3].

Boglehead’s investing reference library

The Bogleheads forum, formerly known as the Vanguard Diehards forum, has, in a very short time, accumulated a very good collection of investing articles in the reference library. This is attributed to the hard work of ‘librarians’ Barry Barnitz (who blogs on The Financial Page and Asset Allocation) and ‘gbs’, as well as many other Bogleheads.

You will be surprised by the amount of information covered. For a start, here is a list of topics in the library:

Table of Contents

A. Glossary
B. Investing: For Beginners
C. Books
D. Academic Research Links
E. About Vanguard and its Founder

II.Asset Allocation
A. Asset Allocation
B. Asset Location
C. Risk, uncertainty and behavioral pitfalls

III.Asset Classes

A. Equity
(a.) US Stocks
(b.) International Stocks
(c.) REITS
(d.) International REITS

B.Fixed Income
(a.) Bonds
(b.) TIPS
(c.) High Yield Bonds
(d.) Convertible Bonds

C. Alternative
(a.) Commodities

IV.Portfolio Management
A. Active vs. Passive Investing
B. Taxable account investing
(a.) ETF
C. Retirement and tax deferred investing
D. Rebalancing
E. Withdrawal Strategies

Wells Fargo’s Free Trade offers HIFO

After signing up for Wells Fargo’s PMA package and Wells Trade account, I was pleasantly surprised to discover that the Wells Trade platform offers an alternative and “automatic” HIFO method of designation for tax lot tracking for both stocks and mutual funds instead of the usual FIFO for stocks and averaging method for mutual funds.

To use the new default method of HIFO, you need to sign up for the free Wells Trade’s Portfolio and Tax tracker tools. The following contains additional details which I am quoting from the sign-up agreement.

Highest-in, First-out Method of Designation (“HIFO”)

If a taxpayer holds more than one lot of shares of a particular stock or mutual fund purchased on different dates or at different prices and sells some of those shares without selling all of them in a single transaction it is necessary for income tax purposes to determine which shares were sold. Unless the taxpayer identifies the shares sold in accordance with applicable regulations and rulings or, in the case of a mutual fund, adopts an averaging method, the taxpayer is deemed to have sold the earliest shares purchased (the first-in, first-out, or “FIFO” method), even if a different selection of shares would result in a lower tax. If a taxpayer elects to use an averaging method for a mutual fund, the taxpayer must continue to use that method for that mutual fund all future years. In all other cases, the taxpayer may identify the shares sold at the time of the sale either by a communication to the broker relating to that particular transaction (“specific identification”) or by establishing with the broker that a particular method of identification will apply to all sales except as the taxpayer otherwise notifies the broker.

By using the Tools, I certify to WFI that I intend to establish with WFI that the equity and mutual fund sales in my Account will be identified by a method of identification under which the shares with the highest cost basis are sold first (highest-in, first-out, or “HIFO”) except as to (a) any mutual fund for which I elect (or have previously elected) an averaging method, or (b) any transaction as to which I have used a different specific identification in accordance with applicable income tax regulations.

I understand:

  • The HIFO method will apply only to the equities and mutual funds sold through this Account.
  • I can override the use of the HIFO method by making a specific designation at the time of a particular sale. This can be accomplished by placing my trade with an agent and informing the agent of the specific designation. HIFO will still apply to all other equity and mutual fund sales (except for mutual funds for which an averaging method applies).
  • I can terminate the use of the HIFO method as to all subsequent sales by canceling my use of the Tools and notifying WFI of this intention in writing.
  • It is believed that in many cases the HIFO method results in lower tax than the default FIFO method, but this is not true for all taxpayers or for all transactions of a particular taxpayer. In some instances, HIFO will result in higher tax than specific identification or FIFO.
  • While the HIFO method is in effect for equities and mutual funds sold through this Account, this method of identification will be binding for federal income tax purposes (except in the case of a mutual fund for which I have elected an averaging method), unless I override HIFO with specific share identification. This is the case even if a different method would produce a more favorable result.
  • The Tools will act as if the HIFO method applies to all equity and mutual fund sales, even those to which it does not apply because of specific share identification or the use of an averaging method for a mutual fund. It is my responsibility to deal with any resulting discrepancies.
  • In some situations the Tools may fail to determine which shares have the highest cost basis for federal income tax purposes (e.g. due to capital changes or application of certain tax rules). I am responsible for dealing with any resulting discrepancy.

So, there you have it. You can sign up and let Wells Trade default to the more tax-friendly HIFO designation all the time. Personally I have signed up for this service but please be aware that I have not experienced first hand how well it works nor vouch for whether it works at all or not!