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Tax and Tax Information - Income Tax

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Tax and Tax Information * Income Tax

The Tax Gifts Keep On Coming   
Jeffrey Voudrie, CFP

<p>
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 two 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%.<p>
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%!<p>
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%!<p>
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!<p>
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.<p>
How should this affect your investments?<p>
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.<p>
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.<p>
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.<p>
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.<p>
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 true in 2008 when the minimum capital gains and dividend rate drops to 0%.

Article to continue below----------------------------------------------

N.Y.âs Paterson Shuns Wall Street Stock Transfer Tax (Update2) (BusinessWeek)
New York Governor David Paterson, facing at least a $9 billion budget deficit, rejected a call for a stock transfer tax on Wall Street.

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Article to continue below----------------------------------------------

N.Y.âs Paterson Shuns Wall Street Stock Transfer Tax (Update2) (BusinessWeek)
New York Governor David Paterson, facing at least a $9 billion budget deficit, rejected a call for a stock transfer tax on Wall Street.

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Nationally-syndicated financial columnist and Certified Financial Planner(R) Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He'll answer your financial question FREE at www.guardingyourwealth.com.

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Index of Articles about Taxes

What Other Authors say about Taxes

Panama: The Benefits of this Jurisdiction for your IBC by Richard Price

Why use the jurisdiction of Panama for your IBC? Does 'no income tax', 'no capital gains tax' and 'no estate tax' capture your attention? If so, read on…Panama constitution provides the highest levels...

How to Deal with C Corporation Tax by Nick Braun EA PhD

<p>The difference between C corporations and all the other entities is that C corps pay their own tax â€" they are not pass-through entities. <p>The corporation pays corporate income...

How Wealth Tax Is Better Than Income Tax by Jim Thio

Wealth TaxDo you want to move money from the wealthy to the poor? Well, tax wealth.Wealth tax causes far less market distortion, and hence, much fairer than income tax. Wealth tax hurt productivity less....

Quick Facts on Disability Insurance by Tony Novak

Quick Facts About Disability Insurance§The sole purpose of individual disability insurance is to replace your after-tax income in the event of an accident or illness. These policies do not provide protection...

Options For Filing And Reporting Small Business Taxes by Gary Ruplinger

Large and small businesses all around the United States are required to file and pay taxes. Small business taxes are applied and determined differently than those of larger corporations. To accurately...

Understanding Business Tax Write Offs by Wade Robin

A tax write off is the same thing as a tax deduction, and if you don't know what expenses are legitimate deductions on your tax return, you won't know what you can legitimately write off either. In the...

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