News Analysis date published New: 
Friday, January 4, 2013 - 13:00
New Date created: 
Monday, January 14, 2013 - 15:56
New Date last updated: 
Friday, January 4, 2013 - 13:00

Here's why the Fiscal Cliff Deal is Great News for Income Investors

Friday, January 04, 2013 1:00 PM

The 157 pages of the American Taxpayer Relief Act of 2012 will never be a best-seller. But for income investors, it was welcome news. Here are some of the highlights...

Personal Income: Every personal income tax rate was set to increase at the end of 2012. Under the new legislation, however, income tax rates have been maintained at 2012 levels for all taxpayers except those making more that $400,000 per year ($450,000 for joint filers). The portion of income above those limits will now be taxed at 39.6%, up from 35%.

Since the income from many asset classes is taxed at ordinary income tax rates, the preservation of the personal tax rates for the vast majority of Americans was particularly important for income investors.

Qualified Dividends: The highest tax rate for qualified dividends had been 15%, but that rate was set to expire at the end of 2012. Under the fiscal cliff scenario, these dividends were scheduled to be taxed at ordinary income tax rates -- resulting in higher tax bills for dividend stock owners.

The new legislation preserves a favorable qualified dividend tax rate -- albeit a little higher for the highest income bracket. The qualified dividend tax rate for those making more than $400,000 will increase to 20% from 15%. For all other taxpayers, the dividend tax rate will be the same as it was in 2012 -- 0% for those that don't exceed the 15% personal income tax bracket and 15% for the balance.

Capital Gains: The gains from securities held for at least one year had been taxed at a maximum rate of 15%. Under the new legislation, only the highest income tax bracket will see an increase to 20%. All other taxpayers will continue to pay either 0% or 15% on long-term capital gains, just as they did in 2012.

In my newsletter, The Daily Paycheck, I tend to hold securities in my real-money portfolio for the long haul, consistent with my goal to reinvest dividends from solid dividend-paying securities for compound growth. So while my strategy is focused on income and growth, it's good to know that when I finally do sell a security, my long-term gains will continue to be taxed at a favorable rate.

Action to Take --> On Jan. 2, the market soared in reaction to the new legislation. But Congress still has a lot of difficult work to do in the coming months. The battles over federal spending cuts and the extension of the debt ceiling are bound to roil the markets. But the preservation of most personal income tax rates, and the favorable tax treatment of dividends and capital gains, is welcome news for income investors going into 2013.

P.S. -- Many so-called "investing" systems promise you the moon and are complicated that they should only be used by professional investors willing to sit in front of their computer screens for hours on end each day. Not this one. It's called the "Dividend Trifecta Strategy," and it just might be the key for regular investors who want to secure a large and steady stream of dividend income right now. Go here to learn more.

Amy Calistri does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.