Income from financial savings help retired persons fill out their retirement income needs. Typically, the well-to-do have chosen municipal bonds for their tax-free income. However because of their tax-free condition, municipal bonds usually pay a substantially reduced rate of interest than ‘taxable’ corporate bonds. However whether well-to-do or not, all retired persons need tax savings. Other income-based investments are generally taxed at ordinary income rates (up to 35%). Nevertheless, the tax savings on qualifying dividends tends to make high-dividend shares a reasonable option for both average and wealthy retired persons.
Normal dividend income is included to your other gross income. After deductions and exemptions, your resulting ‘taxable’ income is subject to taxes at the income tax rate for your filing status. These tax rates have tax brackets that run from 10% to 35% based on how much taxable income you have.
However for 2012 you may be in a position to tax advantage of 1 of the great tax savings. Tax rates on qualifying dividend income (as well as net long term capital gains) might be as low as 0%, based on whether or not your taxable income tax rate falls below the 25% bracket. The table shows the taxable income for the filing status that puts you at the 25% income rate. Beneath that taxable income, your certified returns are tax free; at or above it they’re taxed at only 15% (These rates currently continue through 2012).
Discover high-paying stock dividends for your investment income
Preferred stocks and high-dividend paying stock could serve as an exceptional source of retirement income. Remember that stock dividends aren’t as secure as income from fixed income investments. If you do purchase stocks for income, keep them long enough to make their dividends ‘qualifying’. Then pay either no tax or only 15% through 2012.
When do ordinary dividends turn out to be ‘qualifying’ dividends?
For a stock dividend to be subject to taxes as a qualified dividend, you have to hold the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. This just prevents you from purchasing the stock ‘ex-dividend’ when its price momentarily drops because of the loss dividend. In other words, as long as you are not a short-term trader, your stock returns will likely be qualifying dividends and thereby qualify for the tax savings.
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Investment tax rates versus Income tax rate |
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| Tax rate on net long term capital gains and qualified Dividends | If ‘taxable’ Income tax rate bracket is: |
| 0% | Less than 25% |
| 15% | At 25% or higher |
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Filing Status determines where 25% income tax begins |
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| For filing status | 25% Income tax rate begins at |
| Single: | $35,350 |
| Married Filing Jointly: | $70,700 |
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