A second installment summarizing provisions (and their implications for portfolios) of the “fiscal cliff”-avoiding tax deal, excerpted from Christine Benz’s comprehensive Jan. 3 Improving Your Finances article on Morningstar.com, takes up . .
Tax Parity for Dividends and Long-Term Capital Gains
“What’s Happening: Although the tax on dividends was set to increase to investors’ ordinary income tax rates starting in 2013, the new law will keep the tax on dividends and long-term capital gains linked. Most taxpayers will continue to pay a 15% rate on both dividend and long-term capital gains, the same level in place since 2003. Meanwhile, single taxpayers earning more than $400,000 and married couples filing jointly earning more than $450,000 will pay a 20% tax rate on dividends and long-term capital gains.
“What You Should Do: Tax-aware dividend-focused investors are apt to be pleased that dividend tax rates will remain in line with long-term capital gains tax rates. Nonetheless, most accumulation-minded investors will still be better off downplaying dividend-payers in their taxable accounts. The reason is control: Whereas individual stock investors can delay their realization of capital gains from year to year–and for many years, if they choose–dividends get paid out regardless, and you’ll owe tax on that money. That doesn’t mean you should shun dividend payers, but stocks and funds with high income streams are a better fit for tax-sheltered accounts
and 401(k)s than taxable ones.”
Up next: Increased Availability of Conversions from Traditional 401(k)s to
Roth 401 (k)s.