The Tax Gifts Keep On Coming

Did you know that you can sell a stock at a profit andincome (married filing jointly) and still be in the 15%
pay next to nothing in capital gains tax? Or that youoverall tax bracket. You can have $60,000 in income
may not owe any tax on dividends you receive? It'sand you will only pay 5% in tax on dividends and
true. The Tax Increase Prevention and Reconciliationcapital gains! Between 2008 and 2010 you wouldn't
Act (TIPRA), which was signed into law in early 2006,have to pay ANY tax on dividends and capital gains.
reduces capital gains and dividend tax rates evenIt's the same for those who are single if they have
further down to 0% in some cases. Read on to find$30,650 or less in income.
out more and how you can save money throughHow should this affect your investments?
proper planning.Regardless of your overall tax bracket, dividends and
Capital gains tax must be paid when you sell an assetcapital gains are more valuable than interest because
for a profit. For instance, if you buy a stock at $10 perof the tax savings. Let's say that you have the option
share and sell it two years later for $15 per share,of putting $10,000 into a Certificate of Deposit at 5%
there is a $5 per share gain that is subject to tax.or a preferred stock that pays a 5% dividend. At the
Most of us know that the maximum capital gains taxhighest overall tax bracket, you will owe about $175 in
rate is 15%. But depending on your income, your capitaltaxes on the CD interest, leaving you $325 to spend.
gains rate might be 0%.You will only have to pay about $75 in taxes on the
Your capital gains tax rate is based on your overalldividend from the preferred stock, giving you $425 to
income tax bracket. If your overall tax bracket isspend. That,s $100 more just off of a $10,000
greater than 15%, then your capital gains will be taxedinvestment. In percentage terms, you have 30% more
at the maximum capital gains rate of 15%. Even if youto spend with the dividend-paying investment than with
are in the 35% tax bracket, you still only pay 15% onthe Certificate of Deposit.
capital gains. But if you are in the 10% or 15% overallFor those in the highest tax bracket, to produce the
income tax bracket then your capital gains tax rate issame spendable amount, a Certificate of Deposit
only 5%!would have to earn around 6.25%, or 5.75% for those
There is also a big difference between the way thatin the 25% tax bracket.
dividends and interest are taxed. Dividends are paid byIt's possible to find dividend-paying investments that
preferred and common stocks. Interest is paid oncurrently pay far more than Certificates of Deposit.
bonds and Certificates of Deposit. Interest is taxed atFor instance, I use several stocks for my clients that
your overall income tax rate, as are any gains frompay dividends of 7-10%. They may fluctuate in value
annuities. But dividends aren't. Just like capital gains,whereas a Certificate of Deposit does not, but
qualified dividends are taxed at a maximum rate ofproperly diversified and managed, they are a great
15%. If you are in the 10% or 15% overall income taxway to receive a larger income stream from your
bracket then your dividend tax rate is also only 5%!investments. When taxes are taken into account, the
TIPRA, passed in early 2006, changed this. Betweenamount of spendable income is close to double that
2008 and 2010, the maximum dividend and capitalprovided by the CD.
gains tax rate stays at 15%. But it drops to 0% forThe bottom line is this. If you pay any income taxes at
those in the 10% or 15% overall tax brackets. You canall, you are better off (tax-wise) receiving dividends
have capital gains and receive dividends and NOT payand capital gains than interest. That's even more true in
any tax on them!2008 when the minimum capital gains and dividend rate
Assuming 2006 tax rates, you can have $61,300 indrops to 0%.