Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Further Clues Reveal Gold’s Weakness - 26th Nov 20
Fun Things to Do this Christmas - 26th Nov 20
Industries that Require Secure Messaging Apps - 26th Nov 20
Dow Stock Market Trend Analysis - 25th Nov 20
Amazon Black Friday Dell 32 Inch S3220DGF VA Curved Screen Gaming Monitor Bargain Deal! - 25th Nov 20
Biden the Silver Bull - 25th Nov 20
Inflation Warning to the Fed: Be Careful What You Wish For - 25th Nov 20
Financial Stocks Sector ETF Shows Unique Island Setup – What Next? - 25th Nov 20
Herd Immunity or Herd Insolvency: Which Will Affect Gold More? - 25th Nov 20
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20
THE STOCK MARKET BIG PICTURE - Video - 19th Nov 20
Reasons why Bitcoin is Treading at it's Highest Level Since 2017 and a Warning - 19th Nov 20
Media Celebrates after Trump’s Pro-Gold Fed Nominee Gets Blocked - 19th Nov 20
DJIA Short-term Stock Market Technical Trend Analysis - 19th Nov 20
Demoncracy Ushers in the Flu World Order How to Survive and Profit From What Is Coming - 19th Nov 20
US Bond Market: "When Investors Should Worry" - 18th Nov 20
Gold Remains the Best Pandemic Insurance - 18th Nov 20
GPU Fan Not Spinning FIX - How to Easily Extend the Life of Your Gaming PC System - 18th Nov 20
Dow Jones E-Mini Futures Tag 30k Twice – Setting Up Stock Market Double Top - 18th Nov 20
Edge Computing Is Leading the Next Great Tech Revolution - 18th Nov 20
This Chart Signals When Gold Stocks Will Explode - 17th Nov 20
Gold Price Momentous ally From 2000 Compared To SPY Stock Market and Nasdaq - 17th Nov 20
Creating Marketing Campaigns Using the Freedom of Information Act - 17th Nov 20
ILLEGITIMATE PRESIDENT - 17th Nov 20
Stock Market Uptrend in Process - 17th Nov 20
How My Friend Made $128,000 Investing in Stocks Without Knowing It - 16th Nov 20
Free-spending Biden and/or continued Fed stimulus will hike Gold prices - 16th Nov 20
Top Cheap Budgie Toys - Every Budgie Owner Should Have These Safe Bird Toys! - 16th Nov 20
Line Up For Your Jab to get your Covaids Freedom Pass and a 5% Work From Home Tax - 16th Nov 20
You May Have Overlooked These “Sleeper” Precious Metals - 16th Nov 20
Demystifying interesting facts about online Casinos - 16th Nov 20
What's Ahead for the Gold Market? - 15th Nov 20
Gold’s Momentous Rally From 2000 Compared To Stock Market SPY & QQQ - 15th Nov 20
Overclockers UK Quality of Custom Gaming System Build - OEM Windows Sticker? - 15th Nov 20
UK GCSE Exams 2021 CANCELLED! Grades Based on Mock Exams and Teacher Assessments - 15th Nov 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Taxmageddon 2013 Hits Dividend Income Hard – Here's What to Do

Companies / Dividends Sep 13, 2012 - 10:32 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleLarry D. Spears writes: Every dividend investor loves the arrival of those quarterly distribution checks. But thanks to "Taxmageddon 2013" those checks could get a whole lot smaller.

As things currently stand - with higher tax brackets, no extension of the Bush-era tax cuts and the addition of new levies on higher-income payers to fund Obamacare - the tax bite on some dividend payments could rise from as little as 15% to as high as 43.4%.


That's dramatically higher than the possible hike in capital gains we discussed in Part One of our series on the 2013 tax outlook, which ran last Friday. By comparison, scheduled tax-law changes will increase taxes on long-term profits from 15% to 23.8% for some taxpayers.

Under the current tax laws, dividends received in 2012 are taxed in one of three ways:

•Qualified dividend income - The concept of "qualified" dividends was created by the original Bush tax cuts. It allows dividends received from domestic U.S. companies and certain foreign corporations to be taxed at the recipient's long-term capital gains rate, which is capped at 15% in 2012.
•Qualified dividends from funds - As an extension of the individual preference, qualified dividend income received by mutual funds and exchange-traded funds (ETFs), and passed on to fund shareholders, is also taxed at the individual's maximum long-term capital gains rate of 15%.
•Ordinary dividend income - Non-qualified dividends are taxed as ordinary income to the recipient, meaning they will be taxed at marginal rates ranging from 10% to 35% in 2012.

In 2013, however, three things will - or at least could - substantially boost tax rates on dividends.

That means all stock, mutual fund and ETF dividends to individuals in each of the new brackets - 15%, 28%, 31%, 36% and 39.6% - will be taxed at higher ordinary income rates. (Note: The actual income ranges for each of the new brackets has not yet been set, pending an adjustment to 2012 brackets to reflect inflation.)

Third, taxpayers in the highest marginal income brackets could be assessed an additional 3.8% "Medicare contribution tax" on their dividends, as well as on other investment income.

This new tax, authorized as part of the new Patient Protection and Affordable Care Act (PPACA), informally called "Obamacare," will be imposed on "certain unearned income of individuals, trusts and estates" and will go into effect regardless of any action on the Bush tax cuts - unless Republicans manage to repeal the entire PPACA after the November elections.

The complexity of the Medicare contribution tax rules is why we used the word "could" above. Specifically, the law says:

"For individuals, the 3.8% tax will be imposed on the lesser of the individual's net investment income or the amount by which the individual's modified adjusted gross income (AGI) exceeds certain thresholds ($250,000 for married individuals filing jointly or $200,000 for unmarried individuals). For purposes of this tax, investment income includes interest, dividends, income from trades or businesses that are passive activities or that trade in financial instruments and commodities, and net gains from the disposition of property held in a trade or business that is a passive activity or that trades in financial instruments and commodities. Investment income excludes distributions from qualified retirement plans and excludes any items taken into account for self-employment tax purposes."

Given that, your accountant will most likely have to determine whether you're subject to the new tax; we certainly can't!

However, if you are, this means your dividend income for 2013 will likely be taxed at a 43.4% rate - nearly triple the 15% rate you will owe in 2012 on qualified payouts, or 8.4% more than the maximum of 35% now due on ordinary dividends.

What You Can Do About Taxmageddon

As an individual taxpayer, there's very little you can do to mitigate the impact of this change in 2013. One is urging your Congressperson to extend the Bush tax rules and the other is trying to manage your deductions and income stream to get into a lower marginal tax bracket.

However, on the other side of the equation, if you own a closely held company that has sufficient earnings and profits, you may want to consider declaring and paying a larger-than-normal dividend to you and fellow shareholders this year while the payout will be subject to the lower rates.

Again, be sure to discuss this strategy with your accountant - and do it only if there are sufficient earnings and profits. That's because any distribution in excess of earnings and profits will reduce the shareholders' cost basis in their stock, potentially increasing their capital gain when they eventually sell - which will most likely be taxed at a higher rate at that time.

There is one thing you can do to reduce the future impact of the new Medicare tax on your dividend payouts. You can maximize your retirement-plan contributions each year, since distributions from qualified retirement plans are not included in investment income for purposes of the tax.

Be aware, however, that while those distributions aren't subject to the tax, they do increase your modified AGI. If that pushes you above the threshold, the rest of your investment income might also become subject to the 3.8% levy.

In the next installment in our tax series, we'll review the potential impact of several other scheduled changes, including a sharp reduction in allowable itemized deductions, the increases in employer withholding rates for FICA (Social Security, Medicare, etc.) and revisions to the way business owners can expense certain depreciable assets.

We'll then conclude with a review of the dozen or so other scheduled changes that will affect some or all individual taxpayers in 2013 and the years beyond.

Source :http://moneymorning.com/2012/09/13/taxmageddon-2013-hits-dividends-hard-heres-what-to-do/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules