Dan the Tax Man's  Instablog

Dan the Tax Man
Send Message
I am a 36 year old finance manager at a health IT company. I have been investing in mutual funds for 18 years, and am a CPA. I have been investing in stocks for 7 years. I am married with two kids, ages 1 and 3. My interest in investing is primarily related to retirement and the tax consequences... More
  • Fiscal Cliff Deal And Effect On Middle Class Dividend And Capital Gains Taxes 0 comments
    Jan 25, 2013 11:19 AM | about stocks: KO, PG, PM, T

    Fiscal Cliff Tax Deal

    In early January, 2013, a new tax law was signed into law by President Obama widely known as the "fiscal cliff deal." Primarily, this law was a FICA tax increase, on everyone, and increase of taxation on high income earners.

    What are the primary consequences on middle income investors?

    The answer to this question is the same answer for most tax law, it depends. If 100% of your investments are in tax deferred retirement accounts, such as 401k's or Roth IRA's, your immediate tax consequences are little, if any. However, if you have taxable dividends and capital gains, like I do, you may be affected.

    Income less than $250,000

    If you make less than $250,000, your dividend and capital gains income will be taxed as it was, prior to the fiscal cliff deal. For all income in the 15% federal tax bracket, your dividends and capital gains will be taxed at 0%. If you have income in the 25% bracket and above, your dividends and long term capital gains will be taxed at 15%, up to $250,000 worth of income.

    Example, Married, Filing Jointly, two kids

    Let's say you are married, and have two children. Your income is $90,000 after deductions for 401k contributions and insurance premiums. Let's also say that you have $600 in dividend income from your investment in PG, T, PM, or KO. The maximum amount that you would be able to earn while still benefiting from the 0% tax rate on cap gains and dividends is $100,300, calculated as follows:

    Standard deduction: $12,200

    Personal Exemptions (4): 3900*4= $15,600

    Top of 15% tax bracket= $72,500

    All of these amounts add up to $100,300. This is the maximum amount of income you can report before you begin to be taxed at 15% on dividends and capital gains. Therefore, that $600 of dividend income is taxed at 0%, since adding your income, $90,000, plus the dividend income, $600, only equates to $90,600, far less than the maximum allowable income of $100,300. Therefore, you would still have $9,700 available for additional dividends or capital gains to be taxed at 0%, a reasonable rate for most and yours truly.

    Practical Implications for Retirement

    Because this 0% rate has been "made permanent" by the recent tax law, investors who fall in the 15% tax bracket should consider investing in taxable investments instead of a Roth IRA. The reason is you have more flexibility in when you can sell these investments without incurring a 10% penalty due to age (under 59 1/2).

    Disclosure: I am long PG, PM, T. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: KO, PG, PM, T
Back To Dan the Tax Man's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.