Before this tax year is out, here's a look at the many changes Congress has made affecting the exclusion or deductibility of interest and dividends. First, the $200 individual ($400 for couples filing jointly) exclusion of interest and/or dividends was originally intended to apply only to 1981 and 1982 tax years. The new tax bill limits that exclusion to 1981 only. Thus, when you file your income tax return before April 15, 1982, you may exclude $200 ($400 for couples) of interest earned or dividends received from gross income. The exclusion reduces taxable income whether you use the standard deduction or itemize on the long Form 1040.
Second, for the tax year 1982 the original provision permitting the exclusion of $100 in dividends received from domestic corporations is reinstated, but only for one year. This does not apply to interest earned. If securities are owned jointly, up to $200 may be excluded by a couple filing jointly. Otherwise, each individual must own securities in his or her own name to be able to exclude the dividends - up to $100 per individual.
Third, after Dec. 31, 1982, none of the interest or dividends received may be excluded when figuring income taxes due.
Fourth, interest up to the limit of $1,000 for an individual ($2,000 for couples filing jointly) from the special All-Savers certificates issued by qualified banks and savings and loan associations may be excluded. This is a one-time aggregate amount. The All-Savers certificates are available through Dec. 31, 1982.
Fifth, for tax years after Dec. 31, 1984, a new special interest exclusion becomes effective. The limits are 15 percent of the lesser of $3,000 for an individual taxpayer ($6,000 for couples filing jointly) or the taxpayer's net interest for the year. Without deductible interest as an offset, an individual will be able to deduct up to $450 of interest received ($900 for couples filing jointly). But, when a long Form 1040 is used, the 15 percent allowance applies to net interest after deductions for all interest paid except for a home mortgage or a trade or business. Since this provision does not become effective until tax years beginning Jan. 1, 1985, the IRS is expected to issue detailed regulations on how this provision will be applied. Some questions remain at this time.
Sixth, for four years beginning Jan. 1, 1982, as much as $750 of dividends received from qualified utility companies may be tax-deferred if reinvested in additional shares ($1,500 for couples filing jointly). Thus, for the tax year beginning Jan. 1, 1982, only, you can exclude up to $100 in dividends from any domestic corporation plus defer the tax on dividends of utility company shares when automatically reinvested.s: Suppose you own shares of XYZ Power. The corporation pays dividends quarterly. If you elect to reinvest those dividends automatically in additional shares of XYZ Power, you may defer taxes on the dividends if you hold the newly purchased shares for at least one year. The additional shares carry a cost basis of zero. Thus, if you sell them after a year, you would pay capital gains tax on the total.Currently the long-term capital-gain rate is your ordinary income rate applied to 40 percent of the gain. If your marginal rate is 32 percent, your tax on the gain would be 32 percent of 40 percent or 13 percent of the overall gain.In the game of tax reform, you win a few and you lose a few. Generally, it looks like the gainers won out over the losers in the taxes to be paid on interest and dividends.Preferred stock yieldsI receive a quarterly dividend on 100 shares of Duquesne Light preferred CUM purchased at a price of $24.50. How is the interest rate on these figured? What does CUM mean? What exactly is preferred stock and how does it differ from common stock? Is it worthwhile? I don't believe I am receiving much interest on these shares and wonder if they should be sold. - D. F.Preferred stocks will include on the certificate a specific dividend figure or a percentage of the par price. Duquesne Light has a number of different issues of preferred stock, and your letter did not state the amount of the quarterly dividend (not interest).Preferred stock is so named because its dividends will be paid before any dividends are paid on common stock. In a dissolution of the company, its claims have precedence over claims of common stock owners - but behind the claims of bondholders and creditors.The CUM means the preferred stock is cumulative; that is, if dividends should be passed for any reason, such as a lack of cash, they will be paid up later before dividends are payable to common-stock holders.Preferred stock is less used these days than formerly and is primarily bought for income. You will find that yields on preferred stocks of utility companies, such as Duquesne, will generally be higher than yields on common stock. However, preferred stock is riskier than bonds, and dividends must be declared by the board of directors each quarter.Dividends can be passed without throwing the company into bankruptcy, but the interest payable on bonds cannot be postponed or passed without at least a technical bankruptcy ensuing. Preference stock prices move up and down similar to bond and income stock prices relative to long-term interest rates. Prices are generally down now because interest rates are high. Unless you have a reason to take a loss, this would probably not be a good time to sell. Preferred stocks will likely recover their prices along with bonds when interest rates decline. Readers are invited to send questions to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass., 02115. Only a selection of general-interest questions can be answered here, and no question can be individually acknowledged. References to investments in this column should not be considered an endorsement or recommendation by the Monitor.