The question of whether your stock portfolio should be made up of dividend-paying stocks or growth stocks is a difficult one in an unsteady market. But regardless of which path you choose, taxes must be taken into consideration.
“The biggest change we’ve seen in the last couple of years is on a topic called qualifying dividends,” says Larry Friedmann, director of taxation for the accounting firm of Barnes Wendling. “These are most dividends you would expect to see from U.S. corporations. The federal tax treatment of that is they are all taxed at a 15 percent tax rate. If someone is a high-income earner, his bracket might be 35 percent, but for qualified dividends, they would be taxed at 15 percent.
“The bottom line is that the federal tax rate is much lower than in the past, and it has created an incentive to buy dividend-paying stocks.”
Growth stocks typically don’t pay dividends, in which case the only time you pay taxes on them is when you sell them. The objective is to buy stocks whose share price will increase over time so you can sell for more than you bought.
“As long as you held them for at least a year, they are taxed at the 15 percent rate,” says Friedmann. “The difference between that and a qualifying dividend is that it is considered a long-term capital gain. It’s a different kind of income, but the rate is the same.”
With the same rates, the only question is what strategy you think will earn the most money and whether the rate will last.
“Will the special rate on dividends stay? It’s something I haven’t seen in the 20-some years I’ve been practicing,” Friedmann says. “The question you would have to deal with is, if there was a change in the law, would it be retroactive?”
Congress could decide to change the law and make it retroactive to a certain date.
“They could do it, but if I were a prognosticator, I think the chances of that happening are slim,” says Friedmann. There is no talk of that occurring, and normally what happens when they increase the rate, there is some sort of period where you know the rate will be increasing.” How to reach: Barnes Wendling, (216) 566-9000
