Here's why the Fiscal Cliff Deal is Great News for Income Investors
The 157 pages of the American Taxpayer Relief Act of 2012 will never be a best-seller. But for income investors, it was welcome news. Here are some of the highlights...
Qualified Dividends: The highest tax rate for qualified dividends had been 15%, but that rate was set to expire at the end of 2012. Under the fiscal cliff scenario, these dividends were scheduled to be taxed at ordinary income tax rates -- resulting in higher tax bills for dividend stock owners.
The new legislation preserves a favorable qualified dividend tax rate -- albeit a little higher for the highest income bracket. The qualified dividend tax rate for those making more than $400,000 will increase to 20% from 15%. (Note: only for the portion of income over $400K. The portion under $400K is taxed at lower rates; one of those rates is ZERO, making the EFFECTIVE RATE <20% for total cap gains even for the person making more than $400K). For all other taxpayers, the dividend tax rate will be the same as it was in 2012 -- 0% for those that don't exceed the 15% personal income tax bracket and 15% for the balance.
Capital Gains: The gains from securities held for at least one year had been taxed at a maximum rate of 15%. Under the new legislation, only the highest income tax bracket will see an increase to 20%. All other taxpayers will continue to pay either 0% or 15% on long-term capital gains, just as they did in 2012. (Same deal here: those with income >$400K also get the lower rates for all their income <$400K, making the EFFECTIVE rate <20%).