Ways To Avoid The Dividend Tax Hike

As it stands currently, the tax rate on dividends that companies pay to shareholders will rise significantly at the start of 2013. The current tax rate on the vast majority of dividends (those that fit the definition of a qualified dividend) will jump from 15% to ordinary tax income rates. To add insult to injury, personal tax rates are also set to increase and that means the dividend tax rate will rise to roughly 43.4% at the highest rate, which breaks down to a 39.6% income tax rate and impending 3.8% tax on investment income that stems from new healthcare regulations. With this potential rise, here are three ways to try and offset the coming tax bite.

1. Shift to Retirement Accounts: One of the most straightforward ways to offset the impact of the higher tax hit on stock dividends is to shift the ownership of these stocks into accounts that offer tax advantages.

2. Shift to Growth: Capital gains rates are also set to rise at the start of 2013, but the rise will be more modest.

3. Return to Income: If dividends start to be taxed at ordinary income rates again, then from a tax perspective they will be identical for income generated from many types of bonds.

Source: Investopedia

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