Dividend income

Keep An Eye On Dividends

In 2012, qualifying dividends are generally taxed at a maximum rate of 15% - or 0% for dividends otherwise taxable in the lowest two ordinary tax brackets. Most dividend income received from domestic corporations and qualified foreign corporations is eligible for these favorable rates, as long as you hold the underlying stock.

for a minimum period; generally at least 61 days during the 121-day period beginning 60 days before the stock's "ex-dividend" date (the date on which the stock begins trading without rights to the most recently declared dividend). The holding period is longer for certain preferred stock dividends.

  • Before you sell dividend-paying stocks, check to see if you've held the stock long enough to lock In a favorable tax rate on your dividend income.
  • Timing IS also important with late-year mutual fund investments. Hold off investing in a fund until after the fund's ex-dividend date. Otherwise, the most recently declared dividend will be credited and taxable to you. In effect, part of your investment will be returned to you Immediately as taxable income.

Absent action by Congress, the favorable tax rates on qualified dividends will go away beginning in 2013. Dividends will be taxed at ordinary income rates as high as 39.6%.

Delay Tax On Retirement Plan Distributions

If you leave a job in 2012, you may receive an "eligible rollover distribution" from your employer's retirement plan. Rolling over your distribution to an IRA or a new employer's plan can avoid current income tax on the distribution and allow you to continue building your retirement savings.

If a portion of a lump-sum distribution you are receiving from your employer's retirement plan includes appreciated employer stock, consider taking the stock instead of rolling It over if the distribution qualifies for "net unrealized appreciation" (NUA) tax treatment. Basically, you'll have to pay current income tax, but only on the stock's basis (generally, its value when It was added to your account). Any increase In the stock's value after that lime won't be taxed until you sell the stock and realize a capital gain. Thus, you stand to benefit from deferral and a l favorable long-term capital gains rate. These rules are complex, so proceed cautiously.

Limit Taxes On Social Security Benefits

Retired taxpayers are sometimes caught off guard when they learn their Social Security benefits aren't necessarily tax free. When "provisional Income" - modified AGI (including tax-exempt municipal bond interest) plus half of the Social Security benefits - exceeds certain levels, a portion of the Social Security benefit must be included in income for tax purposes. Look carefully at your year-end transactions to determine if realizing additional income. In 2012 will increase the amount of benefits subject to Income tax.

To avoid or limit income tax on your Social Security benefits, consider taking additional income you may need in 2012 from a Roth IRA if you have one. Unlike distributions from traditional, qualified Roth IRA distributions aren't included in income for purposes of determining whether Social Security benefits are taxable.

Adjusted Gross Income

Once you've accounted for all your income, Form 1040 asks you to figure your adjusted gross Income. AGI is nothing more than a total of your income from various sources minus certain "adjustments" (also called "above-the-line" deductions) allowed by law. The accompanying worksheet lists adjustments that are deductible in computing AGI. is nothing more than a total of your

Will Your Social Security Bennefits Be Taxable?
On A Joint Return
If your provisional income is:
Up to thiS percentage of your benefits will be taxed:
Less than $32,000 0%
Between $32,000 and $44,000 50%
Over $44,000 85%

On A Single Or Head-Of-Household Return
On A Joint Return
If your provisional income is:
Up to thiS percentage of your benefits will be taxed:
Less than 525,000 0%
Between $25,000 and $34.000 50%
Over $34.000 85%

*The provisional income threshold IS zero for a married person filing separately who does not live
apart from his or her spouse for the entire year.

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