Selasa, 21 Desember 2010

Extraordinary dividend income.

The receipt of extraordinary dividends may cause unexpected tax results. Extraordinary dividends are typically the result of larger-than-normal dividends and/or a very low basis in the stock. Dividends are considered extraordinary if the amount of the dividend exceeds 10 percent of the shareholder’s adjusted basis in the stock (five percent if the shares are preferred). All dividends with an ex-dividend date within the same 85 consecutive days are aggregated for the

purposes of computing whether this threshold is met. Individuals who receive extraordinary dividends and later sell the stock on which the dividends were paid must classify as a long-term capital loss any loss on the sale, to the extent of

such dividends. This rule applies regardless of how long the stock was held. Thus, for the investor who anticipated receiving short-term capital loss treatment on the sale, presumably to offset short-term capital gains, unexpected tax consequences may result. Absent this rule, a taxpayer who had already realized a short-term capital gain could buy a stock that was expected to pay out large dividends, hold

the stock only long enough to receive the dividend, and then sell the stock at a loss to offset the short-term capital gain while enjoying favorable tax rates on qualified dividends.

Planning tip # 1. Investment interest expense is only deductible to the extent of current-year net investment income. Dividends that are taxed at the 15-percent

(or zero-percent) reduced rate are not treated as investment income for purposes of this calculation; therefore, you should consider electing to tax a portion

of qualified dividends (or capital gains) at ordinary income rates to increase use of the investment interest deduction. You may elect to recognize just enough of the qualified dividends to be taxed at ordinary income tax rates to offset investment interest expense and allow the remainder of qualified dividends to be taxed at the lower 15-percent rate (or zero-percent rate for lower-income taxpayers). Alternatively, you should consider whether carrying over an investment interest expense into a future year is more advantageous than electing to recognize qualified dividend income (and/or capital gains) as ordinary income for a current-year offset. With the expected increase in 2011 tax rates applicable to

long-term capital gains and dividend income, carrying an investment interest expense over to 2011 may prove the better choice.

Planning tip # 2. Some margin accounts allow a broker to borrow shares held in the margin account and return the shares at a later date. In practice, the broker

borrows shares from a pool of investors in order to lend the shares to another investor to execute a short sale. For tax purposes, payments that are made while the shares are lent are considered payments in lieu of dividends, rather than dividends, and thus will not qualify for the lower 15-percent rate (or zero-percent

rate for lower-income taxpayers). Unless your broker already has notified you of its policies regarding share borrowing, consider consulting with your broker to see

whether it is the broker’s policy to borrow shares from noninstitutional investors. In certain cases, an investor may want to transfer dividend-paying shares into a cash account or place a restriction on the broker’s ability to borrow the shares. Alternatively, an investor may want to have the ability to call back shares of stock before the dividend date so that he or she will be the owner of the

shares on the dividend record date.

Planning tip # 3. You should know how much you stand to lose. What is the downside risk in your current portfolio? Computer modeling can help you assess potential worst-case results. The tradeoff between risk and return is at the root of all investment planning; therefore, it is critical that you remain actively involved

in deciding how much risk you are willing to accept. Understanding up front the potential downside of your portfolio can help you overcome reactionary urges in

volatile markets. While some asset classes may be characterized by higher market value volatility, the addition of such asset classes in moderation to a

portfolio actually may help reduce the volatility of the portfolio as a whole.

Planning tip # 4. Taxpayers interested in family wealth planning can consider gifting assets that are expected to pay dividends to family members who are in lower tax brackets. As noted above, taxpayers in the highest four tax brackets are currently taxed at 15 percent on qualified dividends, whereas taxpayers in the lowest two brackets are taxed at zero percent. You should remain mindful of

the kiddie tax rules discussed further. In addition, pay close attention to possible 2011 rate increases.

Planning tip # 5. In order to qualify for the reduced rate of 15 percent, the underlying stock upon which a dividend is paid must be held for at least 61 days during the 121-day period, beginning 60 days before the ex-dividend date (91 days of the 181-day period for preferred stock). The shares must not be subject to a

hedging transaction during this time period in order to qualify; therefore, if you regularly engage in hedging transactions or other derivative transactions, you may

want to consider more complicated investment techniques, such as selling a qualified covered call, in order to take advantage of the lower rates.

Planning tip # 6. Within equities, it is also important to diversify your holdings among those with growth styles (managers who look for companies they believe are likely to have above-average growth, even if their share price seems expensive) and those with value styles (managers who focus on stocks they believe are underpriced based on an evaluation of their book value and other factors the antithesis of the growth style-managers). Maintaining a balance of growth and value exposure may help your portfolio benefit from these cycles. Mutual funds offer some opportunity for savings as certain share classes have reduced costs. Separate account managers,

however, generally afford affluent investors the opportunity for a lower cost structure.