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iShares TIPS Bond Message Board

  • bare4 bare4 Jan 14, 2010 11:05 AM Flag

    TIPs and taxes

    If you own the ETF-TIP in a taxable account, do you only pay tax on the distributions you receive yearly? I assume reported on your 1099 as interest, correct? Of course, when you sell TIP you will have either a capital gain or loss, based on difference of original cost and price when sold.

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    • Re:"But you don't pay state income taxes on Tips dividends/interest, right?"

      See pages 19 and 20 of the fund's prospectus at:

      http://us.ishares.com/content/stream.jsp?url=/content/repository/material/prospectus/tip_prospectus.pdf

      The most relevant sentence states: "Certain states and localities may exempt from tax distributions
      attributable to interest from U.S. Federal government obligations. Consult your
      personal tax adviser . . ."

      Note the link that chipster22a provided on dividends show that a small part (10-15%) of the last ten dividends included a return of capital component. Technically (for after tax accounts) you don't pay ordinary income tax on that component but reduce your basis in the investment which affects the capital gains you report when you dispose of the investment.

    • "But you don't pay state income taxes on Tips dividends/interest, right?"

      Correct. This is from the government's website.

      "Interest payments from Treasury Inflation-Protected Securities (TIPS), and increases in the principal of TIPS, are subject to federal tax, but exempt from state and local income taxes."

      I live in a state with no income tax so it doesn't affect me. It is an advantage for most people though.

      I believe this also applies to TIP, but I've never really needed to know for sure.

    • But you don't pay state income taxes on Tips dividends/interest, right?

    • The simple answer is just...

      1. The CPI came in at -0.2% in December. That's deflation.
      2. TIPS will see their inflation adjusted value drop by 0.2%.
      3. Interest payments will be lowered by 0.2%.

      Should the deflation continue until a given TIPS bond matures, then you are still guaranteed to get ALL of your original principal back if you bought it directly from the government though. TIPS do have some deflation protection.

      However, if you bought it from someone else and paid a premium for it because it had inflated in price, then that inflated amount could vanish permanently if deflation continues. For example, buying TIP at these prices could work out poorly if deflation continues. TIP got pretty beaten up when oil crashed from $140+ to $30+. It could happen again.

      That said, on a seasonally adjusted basis December was still slightly inflationary. The reason is because Decembers are generally more deflationary than most months. TIPS investors should probably therefore not be too alarmed by December's deflationary readings.

      Seasonally adjusted, December's CPI rose 0.1%. The seasonally adjusted data is not used to determine payouts but it is probably closer to what the true inflation rate is doing. All things being equal, the money TIPS investors lose due to December's readings should be made up during the more inflationary months of the year. Further, the market should have priced it in.

      All things are not equal though. It's anyone's guess which force will be more powerful going forward. Many seem to think inflation is a sure thing. I'm not in that camp.

      Roughly 1/4th of the CPI is based on rent prices. I see those falling as housing continues to struggle.

      Oil is now $80 again. I've said before I thought that $80 would hold. The global economy can't support prices much higher. If so, then oil could fall as the upward momentum dies. The recent rise in the CPI has been mostly due to rising oil. What's going to happen if oil can't rise further?

      Deflation is the bigger risk to me, at least in the short-term. I am sympathetic to the inflationary arguments though. I only lean towards deflation. There are massive deflationary AND inflationary forces at play.

      I'm more deflationary than most simply because I do not believe in the Chinese miracle. Even though the Chinese stock market is roughly 50% off of its highs, I still think their economy is just one big "ponzi scheme" type bubble.

      "China's Housing Bubble"

      http://shanghaiist.com/2010/01/14/chinas_housing_bubble.php

      "As things are, it seems impossible for China's real estate bubble to continue like this. Luckily for those of us who prefer to rent, average rental prices are somewhere around 1/500th of the value of the property."

      How can that possibly end any better for them than it did for us? Chinese investors are sure it will never end. These are the same investors who were sure that their government wouldn't let their stock market fall heading into their Olympics. They were SO wrong. It fell and it fell hard.

    • In this case for February 2010, does this say the index drops to - February 28 2010 215.96261 1.08810 and will reflect a lower next interest payment as well as lower bond price?

    • You are mostly correct. There is a minor clarification though.

      The TIP distributions were reported to me as "ordinary dividends" on my 1099-DIV last year (not "interest"). It isn't considered "qualified dividends" though so it is basically taxed just like interest income would be.

 
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