Tax Breaks on Dividends Ends in 2012

This post explains two tax breaks on stock and mutual fund "qualifying dividends" (explained below) scheduled to end December 31, 2012

Income from savings and investments help retirees meet their retirement income needs. Traditionally, the well-to-do have chosen municipal bonds for their tax-free income. But due to their tax-free status, municipal bonds typically pay a considerably reduced rate of interest than 'taxable' corporate or government bonds. And not all retirees have a sufficiently high tax bracket to justify the lower, yet tax-free, municipal bond investment. But whether well-to-do or not, every retiree requires tax breaks to increase spendable income.

Most income-based investments (e.g. interest from bonds and bond funds) are usually taxed at ordinary income rates (as high as 35%). But the tax breaks on qualifying dividends tend to make high-dividend stocks an attractive alternative for both average and rich retirees.

Ordinary dividend income is included with your other gross income. After deductions and exemptions, your resulting 'taxable' income is taxed at the income tax rate for your filing status. These tax rates have tax brackets that run from 10% to 35% depending on how much taxable income you have.

But for 2012 you may be in a position to tax advantage one of the excellent tax breaks. Tax rates on qualifying dividend income (in addition to net long term capital gains) might be as low as 0%, depending on whether or not your taxable income tax rate drops below the 25% bracket. The table below shows the taxable income for the filing status that puts you at the 25% income rate. Below that taxable income, your qualifying dividends (and long term capital gains) are tax free; at or above it they're taxed at only 15% (These tax breaks presently continue through 2012).

When do ordinary dividends become 'qualifying dividends'?

For a stock dividend to be subject to taxes as a qualifying dividend, you must maintain the stock for more than 60 days during the 121-day period that begins sixty days before the ex-dividend date. This just prevents you from purchasing the stock 'ex-dividend' when its cost temporarily falls due to the paid dividend. Put simply, as long as you're not a short-term trader, your stock returns will be qualifying payouts and thereby qualify for the dividend tax break.

Find high-paying stock dividends for your investment income
Preferred stocks (be careful as some preferred shares do not qualify for the tax break) and high-dividend paying common stock can serve as an excellent supply of tax-free or low-taxed retirement income. Keep in mind that stock dividends are not as safe as income from fixed income investments. In case you do purchase stocks for income, keep them long enough to make their dividends 'qualifying'. Then pay either no tax or only 15% through 2012.

You Pay More Taxes Than Necessary

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