The dividend stock payoff will not be as attractive if the tax rates go up. If a deal is reached before the January 1st deadline it may be feasible for lawmakers to negotiate a more attractive rate.
Currently the tax rate on income incurred from capital gains is 15%. As of January 1st, 2013, the income investors receive from capital gains could be taxed up to a rate relevant to their tax bracket. The chart below shows how each tax bracket will be affected by the higher tax rates on capital gains.
The possibility of a higher tax rate may cause investors who typically enjoy the payoff of dividend yielding stocks to start researching alternative investment strategies. One such alternative may be to hold on to a handful of stocks that have long term growth potential. Tech stocks are known for their high growth rate and may prove to be a popular choice for investors. According to Bloomberg, the information technology sector is estimated to grow revenue 8.7% through the 2013 fiscal year.
Anxiety over the possible increase in tax rates has made the muni bond market a popular choice for investors in higher tax brackets. Muni bonds are currently tax exempt, providing a more stable investment opportunity ahead of the fiscal cliff.
Author: Tyler Sciortino
