Only a few short weeks ago, many investors feared that
big changes in the tax laws
could make many of their investments a lot less attractive. But
now, Congress has given you a lot more certainty on the tax front
going forward, and by making the right investments, you can make
the most of what lawmakers have given you.
What you need to know this tax season
With the looming expiration of some major tax breaks last year, you
right to be scared
about what could have happened. Without action, tax brackets would
have risen across the board, raising taxes not just for high-income
earners but also for those with the lowest taxes as well. A host of
other expiring provisions would have removed or lessened
preferential treatment for certain investments, potentially leading
investors to sell them off and thereby cause a drop in the stock
But in a compromise, lawmakers and the president agreed to
extend the full suite of favorable tax provisions until the end of
2012. Here's a sample of some of the beneficial provisions:
- Long-term capital gains will continue to be taxed at a
maximum 15% rate. Those who are in the 10% or 15% tax brackets
pay nothing on capital gains.
- Qualified dividends also have a maximum tax rate of 15%
applied to them. In general, if shares are listed on a U.S.
exchange and you own them for more than 60 days surrounding the
date of the dividend, then you'll qualify for the lower
- Lower brackets across the board will keep taxes at a lower
level. In addition, to replace the
Making Work Pay tax credit
that gave most taxpayers $400 or $800 in 2009 and 2010, a payroll
tax holiday will drop the Social Security withholding rate by 2
percentage points, potentially saving each worker as much as
$2,136 in payroll taxes this year.
As a result of these changes, investors will enjoy the status
quo for another two years. So as you consider investing strategies
to take advantage of these tax provisions, you may be able to use
some of the tried-and-true techniques you've already been
Looking for dividends
Obviously, in order to take maximum advantage of favorable tax
provisions, you want to earn the highest capital gains and
dividends you can. Capital gains are impossible to predict, but
finding dividend-paying stocks has never been easier.
You might think that picking the
would be the right move. But many of the stocks with the biggest
dividends right now don't meet the requirements for qualified
dividends. In particular, shareholders of real estate investment
American Capital Agency
) have to pay their regular income tax rate on the dividends they
But even if you take the absolute highest yields off the table,
you still have plenty of high-dividend choices that
qualify for favored treatment. Here are six for your
Potential Annual Tax Savings on $10,000 Investment
Source: Yahoo! Finance. Tax savings based on taxpayer in 35% tax
Whenever you're contemplating a stock, tax considerations should
never be the only basis for your decision. Just because a stock
pays a dividend that qualifies for lower tax rates doesn't mean
that it's automatically a winning investment.
In fact, most of these companies face some significant
challenges. FirstEnergy, for instance, has seen its
stock drop substantially
as utilities have generally underperformed the overall market.
Lilly desperately needs its drug pipeline to pay off with some
blockbuster drugs to
replace those that are going off-patent
soon. And according to some analysts, rural telecoms Windstream and
doomed to obsolescence
, with virtually nonexistent growth prospects.
But for those willing to take those risks, the lower tax rates
on their dividends are an added bonus. As long as dividend stocks
enjoy lower taxes, they'll almost certainly stay in the forefront
of investors' minds for the next two years and beyond.
The less taxing way to invest
What will happen to taxes beyond 2012 remains uncertain, especially
with a new Congress potentially signaling an about-face in fiscal
certain, though, is that by taking advantage of tax breaks while
they're available, you'll be able to keep more money in
For more great dividend ideas, be sure to check out
this free report on dividend stocks
. Our Motley Fool analysts have identified 13 dividend-paying
stocks that are good long-term plays. To download for free now,
Tune in every Monday and Wednesday for Dan's columns on
retirement, investing, and personal finance.