Kelly Bullis: Why shoot for 100% qualified dividends?

Tax Tips (and other stuff)

Warning! Here comes one of Kelly’s rants. Read at your own risk.

One of my pet peeves is when preparing folks’ tax returns, I see all too often a large percentage of folks owning some or a lot of foreign dividend paying stocks.

Why does this bother me? Two main reasons actually, the first and main one involves missed tax savings, but the second is equally a concern.

Let me go over the second concern first. Why would any American want to invest their money in a way that benefits foreign countries, foreign workers and foreign activities that may be detrimental to U.S. interests?

How does this happen anyway? Usually, folks are encouraged to invest in some mutual fund that includes foreign stocks. You usually don’t even know which foreign companies or countries you are investing in when you purchase shares in funds like, “American Funds International Growth and Income” or “Hartford’s Emerging Markets ETF” or “Franklin International Growth Fund” or etc. You get the picture, sometimes the fund name includes “international” and sometimes it doesn’t. But quite a few of these recommended funds do include foreign stocks.

The tax savings is more obvious. Best demonstrated by an example. Let’s say you are single, 70 years old, retired with Social Security, decent pension and investment income, including dividend-paying stock investments. Your pension is $90,000, your taxable Social Security is $34,000, your interest income is $6,000, your dividends are $25,000, of which only $10,000 are qualified. (That means you have $10,000 of dividend income from foreign stocks.)

You paid $500 in foreign taxes on your foreign income. Your tax is going to come to about $24,000. Minus the foreign tax credit of $500, you pay $23,500 to Uncle Sam. If 100% of your dividends were qualified, your tax savings would be an additional $900. (Qualified dividends are taxed at a lower rate… in this example 9% less, and no foreign tax paid or credit given… a wash.) How about that? You invest 100% in America and get to keep almost an additional thousand dollars as a “reward” compliments of the U.S. Congress.

But Kelly, how do I avoid investing in funds that include foreign stocks? My answer, ask your broker to only recommend 100% U.S. stock investment funds or individual stocks that pay high dividend yields. If you are interested in specific individual stocks, currently here is a short list… Illinois Tool Works; Valero Energy; Garmin; McCormick; AT&T Home Depot; JP Morgan Chase; General Dynamics; American Electric Power; and many more. I personally also like local public utilities like NV Energy, Southwest Gas, etc.

Have you heard? Proverbs 4:7 says, “The beginning of wisdom is this: Get wisdom, and whatever you get, get insight.”

Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. On the web at BullisAndCo.com Also on Facebook.