Dividend taxes go up -- for a select few

Sure, taxes on dividends increase under the fiscal cliff resolution. But only if you make $400,000 or more. Otherwise, dividends are still taxed at 15%. No wonder dividend-paying stocks went up Wednesday.

By Charley Blaine Jan 2, 2013 8:09PM
© ThinkStock/SuperStockThe bad news is that taxes on dividends were raised in the negotiations over the fiscal cliff that ended on Tuesday.

The good news is that dividend rates were changed only for the most affluent. Moreover, taxes on dividends, along with taxes on capital gains, mean dividends and dividend-paying stocks will continue to have a favored place for investors.

The bill that Congress passed and President Obama says he will sign raises the top rate on dividends to 20%. But that rate applies only if you are single earning $400,000 or more a year or if you're married and filing jointly and earning $450,000 a year or more.

For everyone else, the rate on dividends is still 15%. The bill also capped taxes on capital gains at 15% and 20% for the most affluent.

Result: Dividend-paying stocks like AT&T (T), Merck (MRK), Washington Real Estate Investment Trust (WRT), Edison International (EIX) and Pfizer (PFE) enjoyed solid gains. AT&T jumped $1.29 to $35. Coca-Cola (KO) climbed $1.35 to $37.60.
Caterpillar (CAT), which pays a dividend of $2.08 per share a year, was up $3.89 to $93.50.

Now the good news in the dividend rates is this: The talk before this weekend was that going over the fiscal cliff meant dividends would be taxed as ordinary income -- as they were under the Reagan administration's 1986 tax law.

In other words, investors were looking at a 39.6% rate or higher on dividends.

No wonder companies like Wynn Resorts (WYNN), Las Vegas Sands (LVS) and others declared special dividends to return cash to shareholders (often the CEO) before higher tax rates kicked in.

Didn't happen. And dividend-paying stocks will still attract investors looking for income.
10Comments
Jan 3, 2013 10:48AM
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Those of us making less than $400K / $450K a year now have a permanent (as permanent as can be expected) advantage on investment income over the so called wealthy.  I believe everyone should pay less in taxes on dividend and capital gains taxes.  There is no guarantee you will make a profit when you make an investment, (you could loss money), so an incentive needs to be place to encourage investments.

 

Additionally, money invested in stocks, bonds etc. has already been taxed when a person earned it.  Way to many people make statements about taxes who are clueless.  I do my own taxes each year and I have better knowledge than the average person.  When you talk about effective or nominal tax rates most people do not know the difference how to calculate.  Married couples either get a standard deduction of $11,900 or actual deductions if more, plus $3,800 personal exemption for each person.  If you use the standard deduction and are married with no children this is $19,500 you do not pay tax on.  To calculate your effective tax rate you have to divide the total federal income tax by the income before these deductions, which is much less than most people think they pay.  For instance in the above, if you had $60,000 in income your taxable income would be $40,500.  You would pay 10% on the the first $17,900 of this $40,500 and 15% on the remaining $22,600, or $1,790 + $3,390 or $5,180 total federal income tax.  This is an effective tax rate of 8.63%, ($5,180 divided by $60,000.)

 

ObamaCare is going to cost everyone going forward with hidden taxes in the bill.  Better buckle in and get ready for a rough ride.

Jan 3, 2013 12:26PM
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Hold on there Charley the story is not over yet.  Obama plans more tax hikes.  Interesting how you omitted his plan.

http://washingtonexaminer.com/obama-we-raised-taxes-but-the-rich-still-arent-paying-their-fair-share/article/2517443#.UOWuiW_O00O
Jan 3, 2013 3:02PM
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Ah......Totally clueless.....Be us many...

A Couple Items here that many miss, probably(does make a difference) because I'm Retired...

 

If your Investments(any investment or savings) are in IRAs, they are tax deferred; Paying taxes only on the withdrawl amounts after age 591/2.....Of standard incomes or at what levels you withdraw; Staying under certain thresholds, can lower the tax bill substancially. Cap. Gains, Dividends and Interest accrued are all just part of the IRA...Taxed as income or un-earned(?) income.

Better yet are ROTH IRAs....After meeting 5 year requirement all withdrawls are tax exempt. Irregardless of amounts

The BEST part, all trading, investing, savings divs and interest, cap gains, sales gains are not taxed until withdrawl times on the IRAs....

Any gains in a ROTH, from those above movements are not taxed at all....

Most all large Investment houses or Trading houses can hold those Accounts for you at a minium cost, sometimes just the price of trades...? 

Jan 2, 2013 10:06PM
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Who cares if you`re paying more taxes.The market is up 64% with Obama.
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