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By Jason Stipp | 02-09-2012 01:00 PM

Sidestep Unpleasant Tax Surprises in Your Portfolio

Morningstar's Christine Benz gives investors a heads-up on foreign-stock dividends, enhanced index funds, fast-trading managers, AMT and muni funds, plus MLPs.

Jason Stipp: I'm Jason Stipp for Morningstar. It's Tax-Wise Investing Week on Morningstar.com, and today we're talking about ways that investors can be proactive and avoid unpleasant tax surprises in their portfolios.

Here with me to offer some tips is Morningstar's Christine Benz, director of personal Finance.

Christine, thanks for joining me.

Christine Benz: Jason, great to be here.

Stipp: So, you gave me a few unpleasant surprises that investors might encounter in their portfolio. The first one has to do with a very hot topic around here, dividends, and especially, foreign dividends. We know that investors are now roving the globe trying to find income-payers, but from a tax perspective, there are few things to keep in mind if you're looking overseas for your dividends.

Benz: That's true, Jason. You're right--in some cases foreign stock dividends are higher than what you might get from comparable companies here in the U.S., so the attraction is there.

The potential pitfall is that if those dividends from foreign stocks don't count as qualified dividends, they may be taxable at your ordinary income tax rate. They wouldn't be subject to the currently favorable 15% tax, but rather your ordinary income tax, which is going to be much higher, in some cases twice as high, as what you might pay for dividends.

Stipp: So, we know that foreign dividends are one thing to keep on your radar, but we also know that longer term, we might see different treatments for all dividends. It's something that will expire if Congress doesn't take action. What should you be thinking about there [with respect to] the kinds of the investments that you are holding?

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