How to Handle Accounts With Both Taxable Investments and Tax-Free Bonds

No. If the entire account is set to Tax-Free Interest, WealthTrace will not currently treat capital gains and dividends from the taxable investments in that account as taxable.

How you should enter the account depends on whether it is linked or manually added.

Linked Accounts

If the account is linked, set the Account Type to Taxable rather than Tax-Free Interest.

Then use the setting:

Is a portion of this account in tax-free bonds?

Enter the percentage of the account’s interest-producing investments that should be treated as tax-free.

For example, suppose an account is allocated as follows:

• 50% bonds
• 50% equities

If you enter 40% for “Is a portion of this account in tax-free bonds?”, WealthTrace applies that 40% only to the portion of the account generating interest income.

In this example:

• 50% of the account is in bonds.
• 40% of that bond portion is treated as tax-free.
• 50% × 40% = 20% of the total account is effectively treated as generating tax-free interest.

The remaining bond interest is treated as taxable, while dividends and capital gains from the equity portion continue to receive their appropriate tax treatment.

This setting does not mean that 40% of the entire account is tax-free. The percentage is applied specifically to the portion of the account generating interest income.

Manually Added Accounts

For manually added accounts, you will currently need to split the holdings into two separate investment accounts:

• A Taxable account for equities and other taxable investments.
• A Tax-Free Interest account for municipal bonds or other tax-free interest investments.

This helps ensure taxable income, MAGI, and calculations such as the Net Investment Income Tax (NIIT) are handled correctly.

Planned Improvement

We plan to improve how mixed accounts are handled so that taxable dividends and capital gains can still be recognized when an account also contains tax-free interest investments.

This article will be updated when that functionality is available.