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bjbj Hello everybody and welcome to another episode of Erickson TV. Curtis here with Lauren.
Lauren, right now we are in the heat of finishing up the deadline for tax returns. We re talking
about finishing up the 2011 tax returns. What we do know is that generally most of the provisions
in the tax law for 2011 are also going to be in place for 2012. But 2013 is a whole
different story. The knowable information is that if the president at the end of the
year, which will be Obama, cannot come to an agreement with the House and the Senate,
the current tax provisions are set to expire and we are going to go back to the 2001 tax
law. You wrote a great note to some of your clients saying, The party is over. When it
comes to investment taxes, first there was a change to tax laws on dividends, which mostly
helped people in higher tax brackets. For the purposes of this video we are not even
going to explain the difference between qualified dividends and ordinary dividends. Because
if won t matter for much longer. But for now, most dividends that you see from American
companies that are being invested are qualified. So for qualified dividends, the highest tax
you could possibly pay was 15%. And of course your ordinary income tax would be much higher
than that. Then in 2008, I believe, they changed it in a way that really benefited people in
the lower tax bracket. If you were in the 10% or 15% tax bracket, you paid $0. Qualified
dividends, you didn t pay any tax on them. For retirees, especially with the 2008 change,
this was a really big deal. If all you had were qualified dividends then you didn t pay
any taxes. Well this is going to end pretty soon. It will be a little bit of an eye opener
for people that have gotten used to paying extremely low taxes on their taxable investments
as long as those dividends were qualified dividends. On January 1, 2013, you are going
to pay your ordinary income rate on all dividends regardless. And a lot of people s ordinary
income rate is going to go up in addition. Right now the highest rate is 35% and it s
going to go up automatically to 39.8%. There s also a surcharge on this health care bill
that adds another 3.8%. So if you are already in the top tax tier, you could be paying 48.6%
on your dividends. So you went from 15% to 43.6%. And if you re in the 15% tax bracket
you are going to go from 0 to 15. This is going to be a pretty big difference. And I
think it s going to affect the way people think about investments. From a planning point
of view, everyone was celebrating that Apple computer, for instance, was issuing a big
dividend filing. That was probably not the best timing. It s actually better to have
low turnover investments with perhaps even lower dividends and generate more capital
gains because, at least right now, capital gains taxes are going to change. They are
not going to be as high. We will talk more about this on our next episode. To look at
this proactively, I think Lauren and I would both agree that it is not a bad idea to look
at how your investments are being structured and not worry so much about trying to generate
your growth from dividends. One really good thing that will come out of this change is
that passive investments, whether index funds or the sort of structured funds that we use
for our clients, are going to become more popular because one of the things that these
funds always do well is minimize your tax burden. If you re going to be paying taxes
on your dividends, you really don t want to have to pay a bunch of taxes on short-term
capital gains on top of all that, which is what you often get with actively managed mutual
funds. We ll see you next time on Erickson TV where we ll talk about the other provisions
in the tax law on capital gains. Thank you very much. Bye now. [L[L[L urn:schemas-microsoft-com:office:smarttags
date 2013 Month Year Hello everybody and welcome to another episode of Erickson TV Curtis Erickson
Normal Curtis Erickson Microsoft Word 10.0 Erickson Wealth & Tax Management Hello everybody
and welcome to another episode of Erickson TV Title Microsoft Word Document MSWordDoc
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