Thursday , 13 June 2024

Fiscal Cliff Would See Dividend Tax Rate Almost TRIPLE for Wealthy

Screams about how these top-bracket income tax and capital-gains tax increases will ruin the economy by hammering spending and eliminating the incentive to work can be seen for what they are – the whining of people who don’t want their taxes to go up [BUT, when it comes to the possible increase in the top tax on dividends they have a point – a BIG point – a VERY big point. Let me explain.] Words: 450

So says Henry Blodget ( in edited excerpts from his original article entitled In 6 Weeks, The New Dividend Tax Will Smack Rich People Upside The Head

 Lorimer Wilson, editor of (Your Key to Making Money!), may have edited the article below to some degree for length and clarity – see Editor’s Note at the bottom of the page for details. This paragraph must be included in any article re-posting to avoid copyright infringement.

Blogget goes on to say, in part:

Unless Congress intervenes, taxes are set to rise significantly on January 1st, when we hit the “fiscal cliff”.

Income Taxes 

For incomes over ~$388,351, for example, income taxes are set to revert back to the Clinton-era 39.6% from the current 35%. That’s actually a relatively modest increase, and a 39.6% tax for the top bracket is still historically low.

Capital Gains Taxes

Capital gains taxes are also set to rise, from 15% to 20%. That, too, is a relatively modest increase to a capital-gains rate that is still historically low.

Dividend Taxes

HOWEVER, dividend taxes for those in the top tax bracket will jump from the current 15% back to the Clinton-era 39.6% – and then a new 3.8% surcharge to pay for Obamacare will be added on top, for a total top tax rate on dividends of 43.4%. In short, unless Congress compromises, federal dividend taxes will nearly triple on January 1, from 15% to 43.4%!

What this means is that well-off Americans who are collecting, say, $100,000 a year in gross dividend income will keep about $57,000 next year versus $85,000 this year, a drop of 33%.

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Possible Ramifications

Unlike the change in income taxes and capital-gains taxes, the change in the dividend tax rate is big enough to create a strong incentive for changes in behavior for the highest earning Americans as receiving taxable dividend income income will become strikingly less attractive than it is now.

As a result:

  • the highest earning Americans will likely try to shelter this income in non-taxable accounts or shift  dividend-paying investments to investments designed to produce long-term capital gains (which will still be taxed at a far lower rate than ordinary income) and
  • companies may come under pressure from shareholders to stop raising dividends and, instead, use excess cash to buy back their own stocks.

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Bottom Line

…It’s certainly reasonable to tax dividends at ordinary income rates, unless you’re trying to encourage people to invest in dividend paying investments and, unlike some of the other tax increases that are scheduled to hit on January 1, a top-bracket dividend tax increase will land squarely on the highest earning Americans, folks who arguably have more flexibility with which to be able to afford it….

BUT a jump from 15% to 43.4% is a big tax increase…


Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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