After such a catastrophic loss in the stock market, it might seem irrational to even consider jumping back in, while on the other hand, with stocks priced at fire sale prices and even just a glimmer of hope that this economic downturn will end, it might be the perfect time to be an investor. “That”, I leave to you to decide. “If” you are going to invest in the stock market you need to be prudent. A prudent investor should look for stocks with long term growth potential as well as those stocks with a solid history of dividend payments to the shareholders.
This article will explore the tax implications and possible strategies of stock market investing. In addition to tax free municipals, etc., how does a person maximize their capital and income so as to take additional advantage of the current bull market? There are a couple of methods, some of which are available to the average investor, but some of which, of course, are limited only to the high government policy makers. For example, are you aware that when a person such as Robert Reich (the Secretary of Labor in the first Clinton administration) left the private sector for government service he was permitted to rollover all his investments into a blind fund without having to pay capital gains taxes at the time of the rollover? This little anomaly in the law is not available to the rest of us. Whenever we sell our stocks, bonds, mutual funds, etc., we are hit with capital gains taxes even if we merely rollover the proceeds and make new investments in the market. (Now here’s a tax cut that we all should support! But, that’s another article, or crusade, if you wish).
So, how else can we maximize our dollars for investment? Those of you who are the designated traders of a foreign stock trading account know that there is no capital gains tax imposed upon the sale of stocks from such an account. The broker is, however, required by the IRS to withhold 30% of all dividends paid on stocks held by a foreign stock trading accounts to insure the proper payment of income taxes. Notwithstanding this requirement, the elimination of the capital gains tax on the sale of stocks held through a foreign trading account will have two important results. First, because no capital gains tax is imposed, the investor will purchase and sell stocks more frequently than a domestic investor. And second, the investor will have more capital available after each sale for future investments, for no capital gains taxes have been deducted.
Unfortunately, the majority of us are not the designated traders of a foreign stock trading account, so we cannot take advantage of this tax loophole. But, there is another tax break that is available to all of us. Section 243 of the IRS Code (26 USC 243) states a corporation “shall be allowed a deduction equal to” SEVENTY percent (70%) “of the amount received as dividends from a domestic corporation…” unless the corporation, in specific instances, may deduct ONE HUNDRED percent (100%) of the dividends received. (See 26 USC 243(a)). Although the “dividend deduction rate” is currently as listed above, there is a rumor that this deduction rate may be reduced to fifty percent (50%) during the current Congressional session.
Thus, under today’s law, an individual who receives $10,000 in dividends during his/her tax year must pay taxes on the entire amount received. However, pursuant to Section 243 of the IRS Code, a corporation receiving the same $10,000 in dividends is taxed on no more than $3,000. These tax savings can then be utilized to make additional purchases in the market. And, that is your whole purpose: To have more money available from your investments for future acquisitions.
Additionally, a corporation’s tax rate is generally lower than an individual’s tax rate. Of course, if the individual is a resident of a state with state income taxes (a situation which occurs in the vast majority of the United States) those taxes must also be factored in and the individual tax rate is even higher. A Nevada corporation, on the other hand, pays no state income taxes, so it pays taxes at only the federal tax rate (15% on the 1st $50,000 and 22 ¼ % average on the 1st $100,000 of taxable income).
Remember, corporations are “persons” under the law, and can do everything an individual can do. It can own property. It can enter into contracts. It can buy, hold and sell stocks in its own name. And, as mentioned above, it (particularly a Nevada corporation) pays less taxes than an individual does on identical taxable income. As long as care is taken during its organization to make certain the corporation is not classified as a “personal holding corporation” by the IRS, it makes good sense to conduct all your stock market transactions through a stock trading account in the name of the corporation and not as an individual.