What To Do if Washington Takes Your Retirement Dividends Away
NEW YORK (TheStreet) -- While all eyes are on the tight election race between President Obama and Mitt Romney, income-seeking investors had better focus on tax strategies heading into 2013.
There are major worries as the tax cuts signed into law by President George W. Bush are set to expire at the end of this year, considering that control of the two houses in Congress is split. President Obama has expressed a desire to extend the tax cuts again -- except for individuals earning more than $200,000 a year and couples filing jointly who earn more than $250,000.
For investors, an obvious concern is that their top margin tax rates will increase in 2013. Taxpayers whose current marginal rates are 25%, 28%, or 33%, will see their top rates increase by 3%.
Taxpayers currently in the 35% bracket -- for 2012 earning $388,351 or more, filing jointly -- will see their top marginal rate increase to 39.6%.
For joint-filers earning more than $250,000 ($200,000 for individual filers and $125,000 for married couples who file separately) there will be an additional 3.8% Medicare tax beginning in 2013 to pay for the Patient Protection and Affordable Care Act of 2010, also known as "Obamacare", for the lesser of earnings above the threshold, or investment income.
Taxes on qualified dividend income is currently capped at 15%, which will expire at the end of 2012, without action from Congress and the president. This means that the expiration of the Bush tax cuts can have a huge effect, even on filers who aren't in one of the higher tax brackets.
Under the current cap on dividend taxes, if an investor's adjusted gross income -- again, married, filing jointly -- is below the $70,701 threshold 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. For higher-income investors, the top "all-in" rate paid on taxable dividend income, including the new Medicare tax, can be as high as 43.4%.
At this point, many readers can rightly point out that nobody pays the top rate because of the various income deductions and tax loopholes that exist. But it is a graduated rate, and a portion of the investor's income may well be taxed at or near their highest graduated rate. Therefore, the highest rate can be used for comparing taxable and tax-exempt income investments.