In current financial news there has certainly been plenty of discussion of what the future tax burdens will be for many Americans across the country in 2011. For instance, it has been known for some time now that there will be rate increase for long-term capital gains in the new year. This means that the 0% rate will be removed and the 15% tax rates will increase to around 20%. In perspective, this really isn’t that high of a tax hike when you consider how low the current rates are at present. However, fewer have discussed the increases expected in dividend tax rates in 2011.
The New Terms
At this point, dividends are scheduled to return to more ordinary tax rates; in other words they will be rising. Depending on the individual there could be some serious effects on what amount of taxes you will have to pay on your dividends. This would also mean a reduction in relative rates of return and one’s net fixed income levels. The rates on dividends could get exceedingly high. Of course, with the controversy surrounding the expiration of the Bush-era tax cuts taking center stage in recent months, the issue of dividend tax rate increases didn’t rank high in Senate Finance Committee’s priority list.
Preparing For The Tax Hike
First, keep in mind that the extent of the rate hike is not currently know. All one can do is speculate at this point. This means that any plan you make includes a bit of guess work. There are a few options that might seem to make the most sense given the situation. Obviously, it is wise to exercise prudence and avoid making rash decisions based on speculation. The dividend tax rates are just one factor that must be included when trying to make a sound investment decision. Still, there are some options that you might want to consider further so you have some idea about what to do with your 2011 investment portfolio.
Replace dividend paying stocks with something else – In this context, it might make more sense to change up your portfolio to include a selection of other financial investment tools. One good example is the municipal bond. These tools are issued by the city, county, and state governments and offer less risk than equities. The investor will not have to pay federal tax, state, or local taxes on the interest income either. There are also REITs or real estate investment trusts. Through these tools you can get better than market value on your dividends. Of course, you may still have to pay the regular income tax rate for the distributions unless they qualify at capital gains rates. Plus, REITs may make return of capital distributions that not taxed.
Considering Stock Prices
Lastly, be aware of the fact that if the tax rates are increase, the dividend paying stock prices may experience decreases. There are no surefire ways to determine how much they might drop since we cannot be absolutely sure what the dividend tax rate will be either. You have to be prepared for different results. This may be why some financial experts suggest hedging your exposure. By selling the higher dividend yielding stocks you could put it on a different investment stock to protect some assets.