Tax Planning Tips for Dividend Stocks

With domestic stocks well into the sixth year of a bull market, investors may want to shift their focus. “We believe that that the lion’s share of a client’s equity holdings should be in large, cash-rich multinational companies,” says Greg Sarian of the Sarian Group at HighTower Advisors, a wealth management firm in Wayne, Pa. “We are in the mature stage of the economic cycle, so large-cap stocks may have better prospects now than small- or mid-caps.”

What’s more, sizable firms are likely to be dividend payers, and qualified dividends (including most dividends paid to investors) get tax breaks that can appeal to clients and to their relatives as well. “Single taxpayers owe 0% on qualified dividends as well as on long-term capital gains,” says Sarian, “as long as their taxable income is no more than $36,900 in 2014. For married couples filing jointly, the 0% rate is in effect up to $73,800 of taxable income. Strategies to use the 0% rate can be powerful tax planning tools.” Those yields might be even more alluring if they’re untaxed, but Sarian cautions that the so-called kiddie tax may limit use of the 0% tax rate by youngsters. Nevertheless, the kiddie tax doesn’t apply once someone reaches age 24, so dividend-paying stocks might provide untaxed income for clients’ children who are in graduate school or in the early stages of their careers.

Source: Financial Planning

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