On a brighter note, Garthaite said that his firm's Washington policy analysts pointed out that "Obama has stated that the dividend and [capital gains] tax rates 'will go into the 20s', i.e. will be less aggressive than the official line suggests."
Of course, we have no way of knowing at this point how the fiscal cliff negotiations will turn out, but under the most extreme scenario, a taxpayer earning over $200,000 a year, or $250,000 for married couples, can see the tax rate on their dividend income jump from 15% to 39.6%.
For investors in lower tax brackets, there can also be an extreme difference in federal taxes on dividend income. Under the current cap on dividend taxes, if an investor's adjusted gross income is below the $69,600 threshold for married couples for the 25% tax bracket, the investor is paying no taxes at all on qualified dividends, which include most income from corporate bonds and preferred stock.
Investors soon may have to take more care than before in factoring their federal, state and local income taxes into their decisions on income-producing investments. With interest rates being so low for so long, and with the 15% federal income tax cap on qualified taxable dividends, municipal bond rates have been unattractive to many investors for quite some time. That may change now, although even if we fall off the fiscal cliff, many investors will still be better off with taxable investment vehicles.Two interesting taxable dividend plays that we have highlighted before are Kinder Morgan Energy Partners, LP (KMP) and AmeriGas Partners LP (APU). Both are limited partnerships, which offer certain tax advantages to investors, namely, that certain partnership expenses and capital losses are also "distributed" to investors, lowering the tax on the dividend income, or even eliminating the tax in some years. The disadvantage is that dividend income is reported on a Schedule K-1, making it a bit more difficult to file your income taxes, and distributed loss items that lower your taxes now, could affect your capital gain or loss if you eventually sell the partnership units.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV