Exploiting The Tax Cut
Stock Market News
Exploiting The Tax Cut
Here are some thoughts to consider.
1)Should I adjust my investment strategy?
Perhaps. The important thing to remember is that your goals and tolerance for risk are the key factors that shape your approach to investments. And this has not changed. It probably makes little sense to revamp your entire portfolio in an effort to save a few tax dollars. Experienced portfolio advisors are discouraging investors from making hasty asset re-allocations in response to the new tax cut. They are recommending that investors use this opportunity for a thoughtful review of both investment and retirement savings strategy. It makes good sense to get input from your tax advisor before you make any major investment strategy decisions.
2)What about all the focus on dividends?
Stock market experts believe the real issues here are whether dividend-paying stocks will out-perform others in the long term, and what impactâif anyâinvestorsâ new interest in dividends will have on a volatile market.
Tax experts note that although the tax cut makes dividends more appealing, capital gains are often more attractive for tax purposes. Capital gains can be deferred, while dividend payouts cannot. There are a few things to bear in mind regarding dividends:
- To be eligible for the reduced rates on dividends you must hold the stock for more than 60 days during the 120-day period that commences 60 days before the ex-dividend date. If you donât, the dividend is considered ordinary income and will be taxed at the regular rate.
- Not all dividends are created equal. The reduced tax rates on dividends only apply to qualified dividends from corporations. Many payments commonly called "dividends" are not considered qualified dividends under the tax law. For example: a mutual fundâs "dividend" might include short-term capital gains, interest income and other forms of income that will still be taxed according to your tax bracket. The payout of qualified dividends that you receive from a mutual fund will be eligible for the new lower rates, and the fund statement will have to indicate which payouts are deemed "qualified dividends" and which are classified as ordinary income. Also, be aware that interest earned in a credit union or bank savings account is often called a "dividend". These are interest payments, not dividends, and as such are considered ordinary income and taxed accordingly.
3)What should I consider, if I decide to add dividend stocks to my portfolio?
Experts suggest that you identify corporations that appear able to support the growth of both their share price and dividends. They suggest you look for:
- Debt-to-equity ratio of less than 50 percent
- Dividends per share equal to less than 50 percent of operating earnings per share
- Healthy cash flow or a company that is cash-rich enough to grow the business or increase the dividend.
The bottom line is donât let the prospect of tax savings drive your investment strategy. The new tax cut presents many ramifications for individual investors to ponder. Next month, we will look at the implications for retirement savings and will alert you to some investment gains that donât qualify for the new tax breaks.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.