(Editor’s note: This is the final installment in a three-part series on tax-planning considerations and strategies for tax-year 2012.)
Since 2003, investments that have produced “qualified” dividends generally have been more attractive than other income investments because such dividends are taxed at long-term capital gains rates. Interest from taxable bonds, money- market accounts and certificates of deposit, on the other hand, is taxed at higher, ordinary income rates.
But the appeal of dividends might change in 2013 because qualified dividends might once again be taxed at ordinary income rates for some or all taxpayers.
The new 3.8 percent Medicare tax on investment income also would apply to dividends to the extent that MAGI exceeds the applicable $125,000, $200,000, $225,000 or $250,000 level.
Again, keep an eye on the election and Congress. If it looks like no action is going to be taken to extend qualified-dividend tax treatment to 2013, or like such treatment won’t be extended for your income level, you may want to revisit your asset allocation and sell some dividend-producing investments by year end. You might also benefit from locking in a lower long-term capital gains tax rate and avoiding the additional 3.8 percent Medicare tax. Of course, you first must consider your investment objectives; dividend-paying stock may be attractive even without the tax-favored status.
Expired and expiring tax breaks
Numerous tax breaks expired at the end of 2011 or are scheduled to expire at the end of 2012. Here are just a few that may be relevant to you:
Expired Dec. 31, 2011:
• State and local sales tax deduction in lieu of state and local income tax deduction.
• Direct, tax-free donation to charity from an IRA (up to $100,000) by taxpayers age 70½ or older.