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Should tax on dividends rise?

By Jennie L. Phipps · Bankrate.com
Tuesday, September 7, 2010
Posted: 4 pm ET

When Congress comes back into session in two weeks, the debate over tax rates promises to dominate political discussions through the end of the year.

One of the hottest issues for anyone involved in retirement planning is the proposed increase in the tax rate on dividends. If Congress doesn't intervene, dividends, which are now taxed at a flat 15 percent, would be taxed at ordinary income rates up to 39.6 percent.

Among the most outspoken opponents to raising the tax on dividends are utility companies, whose stocks are often held by people in retirement because they have long paid significant dividends and are a reliable source of income. Utilities see an increase in taxes on dividends as a threat to the overall value of their equity because fewer investors will be interested. Lew Hay, chairman and CEO of NextEra Energy Inc., the company formerly known as Florida Power & Light, wrote in an op-ed published in several Florida papers last weekend, "If a large dividend tax increase goes through, the country will get less dividend income. The end result will be lower consumer spending in Florida and a reduction in retirement wealth for millions of Americans."

Hay points out that this isn't a problem just for wealthy people. Total dividend income earned by Floridians last year was almost $20 billion dollars compared with $12.9 billion in taxable Social Security benefits. Overall, Hay says, Floridians filed 8.9 million tax returns in 2009. More than 20 percent of them reported income from dividends, and 44 percent of those were from Floridians who earn less than $50,000 per year.

Similarly, a nationwide study in 2007 by the accounting firm Ernst & Young found  27.1 million filers received qualified dividends. Some 61 percent were age 50 and older, and 30 percent were 65 and older. About 65 percent had taxable incomes that were less than $100,000, and 36 percent had incomes that were less than $50,000.

People living in retirement have been hard hit by the Federal Reserve's efforts to keep interest rates low. Dividends have been one of the few ways that many retirees have been able to maintain an income and preserve their principal. Congress ought to keep in mind the number of voters at or near retirement as they consider this important tax question.

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1 Comment
Chris
September 08, 2010 at 1:51 pm

But what are the statistics about the amount of dividends received by individuals? How much (percentage) of the dividends are being earned by the rich 1% who control 42% of the financial wealth in the US?