We are fast approaching one of my favorite times of year – tax season! Today I want to talk a little bit about tax season and personal finance.
I know, I know – I’m a little bit weird when it comes to taxes. Most people absolutely dread the thought of tax season. Why do I like it so much? Before I get into that, I want to say just one quick word on taxes: I don’t mind them. If I end up having to pay taxes in a particular year, I’m ok with that. I don’t want to have a political discussion about taxes here. I’ll just say that I generally think we get a pretty good value for the low rate of taxes we pay.
OK – moving on.
Throughout the year I make several personal financial moves to help minimize my tax liability for the year. Just because I generally think we get a good value for our tax dollar doesn’t mean I don’t want to make my tax bill as small as possible! The first thing I do is to make sure I am contributing the matched maximum to my employer’s pre-tax retirement plan. My employer has a 401(k) plan that is offered to all employees. They will also match 100% of the first 5% of my salary that I contribute to the plan. So I make sure to contribute 5% of my salary to my 401(k) account. Becuase this contribution is made pre-tax, I am reducing the amount of net income that I take home which has the result of lowering my taxable income. Lower taxable income = lower tax liability. Since we all know there’s no free lunch, I can’t get away without paying taxes on this money. I will be taxed when I start taking distributions from my 401(k). I don’t contribute more than 5% because I’m not wild about any of the investment options offered in my plan – but I’d be crazy to not take a free 100% return on my money! When my employer matches 100% my contributions (up to 5%) of my income, that’s free money! Tip #1: Always take the free money. If your employer (more…)
One question that many dividend investors are wondering right now is: What’s going to happen with taxes? Indeed, if you are an investor focused mainly on income/dividends, you’ve been quite fortunate recently. As it stands right now, the top tax rate on dividends is 15%. 15%! That’s pretty incredible! This is one reason why some savvy high net worth individuals maintain a large portion of their net worth in dividend paying stocks. Even better if those stocks also feature some growth, as capital gains are also taxed at a very low rate, especially when considered in the context of historical tax rates. Dividends and taxes have a really nice relationship and it makes sense to think about this further.
Here’s what has folks worried: On January 1, 2013 tax rates are set to adjust upwards. The current low rates, which are the result of massive tax cuts from the last several years, are set to expire and rate will reset to their former, higher levels. What kinds of levels? Well, if nothing happens dividends will be treated as regular income. So the taxes you pay on dividends will be determined by your regular tax bracket, rather than being taxed at 15% as they currently are. (more…)