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Guarding Your Wealth for Senior Citizens
It’s Time for the Tax Gifts that Keep on Coming
Through Good Planning
Depending on your income, your capital gains rate
might be 0%.
By Jeffrey D. Voudrie, CFP
Dec. 20, 2007 - Did you know that you can sell a
stock at a profit and pay next to nothing in capital gains tax? Or that
you may not owe any tax on dividends you receive? It’s true. The Tax
Increase Prevention and Reconciliation Act (TIPRA), which was signed
into law in early 2006, reduces capital gains and dividend tax rates
even further—down to 0% in some cases. Read on to find out more and how
you can save money through proper planning.
Capital gains tax must be paid when you sell an
asset for a profit. For instance, if you buy a stock at $10 per share
and sell it 2 years later for $15 per share, there is a $5 per share
gain that is subject to tax.
Most of us know that the maximum capital
gains tax rate is 15%. But depending on your income, your capital gains
rate might be 0%.
Your capital gains tax rate is based on your
overall income tax bracket. If your overall tax bracket is greater than
15%, then your capital gains will be taxed at the maximum capital gains
rate of 15%.
Even if you are in the 35% tax bracket, you still
only pay 15% on capital gains. But if you are in the 10% or 15% overall
income tax bracket then your capital gains tax rate is only 5%!
There is also a big difference between the way that
dividends and interest are taxed.
Dividends are paid by preferred and
common stocks. Interest is paid on bonds and Certificates of Deposit.
Interest is taxed at your overall income tax rate, as are any gains from
annuities.
But dividends aren’t. Just like capital gains,
qualified dividends are taxed at a maximum rate of 15%. If you are in
the 10% or 15% overall income tax bracket then your dividend tax rate is
also only 5%!
TIPRA, passed in early 2006, changed this. Between
2008 and 2010, the maximum dividend and capital gains tax rate stays at
15%. But it drops to 0% for those in the 10% or 15% overall tax
brackets. You can have capital gains and receive dividends and NOT pay
any tax on them!
Assuming 2006 tax rates, you can have $61,300 in
income (married filing jointly) and still be in the 15% overall tax
bracket. You can have $60,000 in income and you will only pay 5% in tax
on dividends and capital gains!
Between 2008 and 2010 you wouldn’t have
to pay ANY tax on dividends and capital gains. It’s the same for those
who are single if they have $30,650 or less in income.
How should this affect your investments?
Regardless of your overall tax bracket, dividends
and capital gains are more valuable than interest because of the tax
savings. Let’s say that you have the option of putting $10,000 into a
Certificate of Deposit at 5% or a preferred stock that pays a 5%
dividend. At the highest overall tax bracket, you will owe about $175 in
taxes on the CD interest, leaving you $325 to spend.
You will only have to pay about $75 in taxes on the
dividend from the preferred stock, giving you $425 to spend. That’s $100
more just off of a $10,000 investment. In percentage terms, you have 30%
more to spend with the dividend-paying investment than with the
Certificate of Deposit.
For those in the highest tax bracket, to produce
the same spendable amount, a Certificate of Deposit would have to earn
around 6.25%, or 5.75% for those in the 25% tax bracket.
It’s possible to find dividend-paying investments
that currently pay far more than Certificates of Deposit. For instance,
I use several stocks for my clients that pay dividends of 7-10%.
They may fluctuate in value whereas a Certificate
of Deposit does not, but properly diversified and managed, they are a
great way to receive a larger income stream from your investments. When
taxes are taken into account, the amount of spendable income is close to
double that provided by the CD.
The bottom line is this. If you pay any income
taxes at all, you are better off (tax wise) receiving dividends and
capital gains than interest. That’s even more so in 2008 when the
minimum capital gains and dividend rate drops to 0%.
If you have a specific question or would like more
information, give me a call toll-free at 1-877-827-1463 or you can also reach me by email at
jeff@guardingyourwealth.com.
I will answer your financial question FREE.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive that may not have appeared in
SeniorJournal.com.
Guarding Your Wealth for Seniors, on
SeniorJournal.com, is
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens.
Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to select
private clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For bookings, email
jeff@guardingyourwealth.com.
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