Wednesday, January 02, 2013

tax rates on dividends still attractive

The bad news is that taxes on dividends were raised in the negotiations over the fiscal cliff that ended on Tuesday.

Now the good news in the dividend rates is this: The talk before this weekend was that going over the fiscal cliff meant dividends would be taxed as ordinary income -- as they were under the Reagan administration's 1986 tax law.

In other words, investors were looking at a 39.6% rate or higher on dividends.

No wonder companies like Wynn Resorts (WYNN +4.96%), Las Vegas Sands (LVS +5.61%) and others declared special dividends to return cash to shareholders (often the CEO) before higher tax rates kicked in.

Didn't happen. And dividend-paying stocks will still attract investors looking for income.

The bill that Congress passed and President Obama says he will sign raises the top rate on dividends to 20%. But that rate applies only if you are single earning $400,000 or more a year or if you're married and filing jointly and earning $450,000 a year or more.

For everyone else, the rate on dividends is still 15%. The bill also capped taxes on capital gains at 15% and 20% for the most affluent.

Result: Dividend-paying stocks like AT&T (T +3.83%), Merck (MRK), Washington Real Estate Investment Trust (WRT -0.46%), Edison International (EIX +1.81%) and Pfizer (PFE +3.31%) enjoyed solid gains. AT&T jumped $1.29 to $35. Coca-Cola (KO +3.72%) climbed $1.35 to $37.60.

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