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Raising taxes on dividends

By Jennie L. Phipps · Bankrate.com
Tuesday, July 24, 2012
Posted: 10 pm ET

Federal tax rates on qualified corporate dividends were cut in 2003 from almost 40 percent to 15 percent. As a result, taxpayers in the 10 percent and 15 percent tax brackets currently pay no taxes on qualified dividend income. Congress extended this tax cut in 2006 and again in 2010. If it is not extended again by the Dec. 31 deadline, tax rates could rise to as high as 39.6 percent for those earning more than $250,000 a year.

Tax constancy Ernst & Young used Internal Revenue Service data to examine who will feel the biggest pinch from this increase. Analysts discovered that 25.4 million tax returns included qualified dividends in 2009, most of them from people at or near retirement age:

  • Among taxpayers age 50 and older, 63 percent declared dividends.
  • Among taxpayers age 65 and older, 32 percent declared dividends.

Of those declaring dividends, 68 percent had taxable incomes of less than $100,000 and 40 percent had incomes that were lower than $50,000.

We're not talking wealthy here.

Dividend-paying stocks have long been the retirement planning investment of choice for people who need steady income and who can't afford any risk. Utility stocks have been particularly popular because even today most pay somewhere in the neighborhood of 4 percent -- not great, but better than bonds.

It's inevitable that tax rates will rise. If we're going to continue to support the giant programs most of us want --  Social Security and Medicare -- we have to figure out how to pay for them. The perception is that increasing taxes on dividends will mostly affect high earners, who can afford it. But Richard McMahon, vice president of finance and energy supply for the Edison Electric Institute, says that's too simplistic.

He says raising taxes on dividends will not only affect small investors directly, it also could drive high-dollar investors elsewhere, which could push up the cost of capital and force utilities to sell more stock. That would lower dividend rates for small investors who don't have lots of other good investment choices. "Retirees can't invest in a dot-com stock and live off the growth because that won't pay the bills," McMahon says.

The Senate and the House are expected to take up this issue in August -- and Democrats and Republicans have polar opposite positions. But no matter how you look at it, holding down interest rates while raising taxes on dividends isn't retirement friendly.

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3 Comments
zilla
July 26, 2012 at 3:38 pm

I feel that if you make a certain percentage of your income of money off stocks you should pay normal rates. But if you don't make above a certain percentage, you should pay a lower rate. That way the romneys of the world pay some taxes too. Being in that upper middle income range means I pay 25%, and these guys that make everything from millions in stocks pay 15? Does that sound right to you?

Bobby Stelly
July 25, 2012 at 5:10 pm

I am an independent and I am not a fan of raising taxes. For the first time in recent history, Pres. George W. Bush thought he could fight 2 wars and give the top earners a huge tax cut. He should have raised taxes to finance the war. He started our financial delcline and Pres. Obama has only added to it. Some people like to say this country is at war, nothing could be further from the truth, our young men and women engaged in combat are at war. We as a country have done absolutely nothing to support and pay for these two wars. I feel we need to cut spending and increase taxes to work towards reducing our deficit. I will 70 years old in March 2013 and never in my wildest dreams could I have ever imagined that I would see this great country of ours fall into the state of moral and financial
decay that we have today. Until this country comes together and Republicans and Democrats do what they were elected to do as oppossed to just being concerned about their respective parties and doing whatever it takes to hang on to their jobs, this country is doomed.

Ray
July 25, 2012 at 10:20 am

It's so easy and popular to lower taxes, but so difficult to raise revenue. We can live with higher dividend taxation. It's been done before. Sure some seniors will be hurt, but seniors can also shelter income in retirement accounts, right? Meanwhile, fatcats should not get away with paying 15%; that's obscene!