As a result of the changes in the tax rules, dividend income and capital gains have gained much more attractive as streams of passive income for investors who are in the bracket of the low and middle class earning.
Alongside other smart portfolio allocation strategies, these dividend tax changes mean you can now effectively drop your tax bill by a significant amount while enjoying the income that can result as check in the mail, a direct deposit into your bank or brokerage account, or a reinvestment back into the companies that paid them.
The tax benefits are potentially substantial; it surprises more people are not talking about the acquisition of dividend stocks and dividend growth stocks to boost existing index fund holdings. Not considering this means potentially leaving thousands of dollars in free money on the table.
In the tax year 2018, individuals that made below $38,600 in taxable income, and married couples that make below $77,200 in taxable income, now pay 0 % taxes on eligible dividends and long-term capital gains.
It is the case among almost 4 out of 5 American households who can get away with evading dividend tax entirely at the federal level. State taxes may still be applicable depending upon where you live, but even in states with above average income, the national tax-free rate remains a significant benefit.
If you are calculative, you may be observing dollar signs as a result of already having mapped out some ways to which you can use this favorable situation to your benefit. Individuals earning below $38,601 and married couples earning below $77,201 in taxable income make building up a long-term priority, diversified portfolio of directly-held individual dividend growth and high dividend yield stocks.
On the other end of the scale, affluent families who have grown up children can reduce their estate taxes, make use of the yearly gift tax exclusion, and save more investment income in the family via a relatively simple technique. Affluent parents can give their grown kids much-appreciated shares of dividend-paying stocks, passing along the cost basis and unrealized gain, so the delayed taxes are not triggered.
At the same time, the adult children are not likely to be earning huge incomes as the parents, especially if they are at the beginning of their career, meaning that unless they are included in one of the handfuls of child tax rules, the dividend income made from the same shares of stock are now tax-free at the federal level.
If for example, you live in New York and are part of the top federal tax bracket. Any dividends you receive will be taxed at 23.8 % on the national level (20 percent for the low dividend tax and 3.8 % for the Obama care tax), also, to be subject to a state tax of 8.8 % and local tax of 3.9 %well. After all, is concluded, you are going to give up 1/3rd of your dividend income to different tax authorities.
If you have a son who is starting a business in Dallas, who is married and he is not yet making any money at the startup, his spouse pulls in $50,000 a year as a teacher. That is far below the $77,201 tax-free dividend exemption level.
As long as this situation continues, you and your spouse can gift your son and his spouse dividend stocks every year, knowing that the dividends will not be taxed at all on the federal or State level as a result of lack of income tax in Texas. That implies that almost 1/3rd of the dividends received on the shares you gave is now resident within your family instead of going to the government's pockets.
With the same scenario described above, an equally intelligent strategy involves making your son, and his spouse sells the appreciated stocks you gifted since the capital benefit in their bracket is tax-free, too.
In effect, this lets you remove the capital gains tax to your kid, have them activate the fee, and let them have that would have gone to the government. If the kid is relatively young, between 25 and 35 years old, the tax savings can be thousands upon thousands of dollars, which can be kept on their balance sheet to compound for 30, 40, 50+ years. This single act can add a significant amount of dollars in the future to the wealth of your family tree.
Making use of this strategy for multiple children and grandchildren and it might be possible to save impressive amounts on your (and their) tax bill. It's one of those things that provide some families an advantage over others; by transferring an asset from one pocket to another and quickening inheritances a bit quicker.
CONTINENTAL TAX AND ACCOUNTING SERVICES