Friday, February 10, 2012

Dividends and Capital Gains Taxes

It probably won't garner much fanfare this time through, but the Bush-era (Jobs and Growth Tax Relief Reconciliation Act of 2003) qualified dividend and long-term capital gains tax cuts are set to expire by the end of 2012. This would potentially more than double the tax on qualified dividends. For non-tax sheltered accounts, this could dramatically affect the net returns of dividend income-oriented portfolios especially if there ends up to be a discrepancy between qualified dividend and capital gains taxes. It will be interesting to see how this affects investment strategies. Tax-free muni-bonds have appreciated considerably during last year. The relative tax efficiency of different investment instruments may change in the decline of special treatment of qualified dividends and long-term capital gains.

Richard Shaw studied this issue a few years ago before Obama and Congress extended the tax cuts.

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