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Money Matters - Year End Tax Planning: Dividends And Capital Gains

BOSTON (CBS) - Dividends are a way a corporation shares its profits with its shareholders. They are still taxed at 15% for this year and are scheduled to return to pre 2001 levels for next year. And for those taxpayers in the 15% tax bracket or lower their dividend income will not be taxed this year. But next year they could see an increase to 15 and 28%.


Dividend income eligible for this 15% tax treatment does not include dividends paid out on money market funds and REITs, Real Estate Investment Trusts.

Qualified dividend income is dividends paid on common stock and certain preferred stock. Your mutual fund could also pay out to you a distribution that would be considered a dividend because they hold dividend-paying stocks.

The capital gains tax rate is15% this year but here again if you are in the lower tax bracket you get more of a break. The tax rate is 0 if you are in 15% tax bracket. To be eligible for the long-term capital gains tax you must have held the asset for at least one year. Hold it any less and it is taxed as ordinary income.

So if you are rebalancing your portfolio and want to sell some holdings be sure you check the tax ramifications. Unless Congress does some last minute tax changes next year's capital gain tax will be 20%. Check in with your financial planner or tax preparer for more help in rebalancing.

Also this may be a good time of year to be checking your mutual funds. Mutual funds must make annual payouts of interest, dividends and capital gains, and they do this usually at the end of the year.

This has been a decent year for the stock market so depending on when you bought your mutual funds or stocks there could be some gains. Call your mutual fund company to see when they will be making their distributions and find out what your tax liabilities are going to be.

If you are planning to buy mutual funds in the next couple of weeks, you want to buy them after they make their distributions so you are not buying a tax liability. If you purchase $10,000 of XYZ Mutual and it makes a distribution of 10%, you will owe taxes on $1,000.

If you own the mutual fund in your retirement plan you don't need to worry about distributions for your profit is tax deferred until you begin to make withdrawals.

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