It’s interesting to see that despite all of the commentary and analysis about dividend investing taking place in the blogosphere, so little is being said about the impacts that letting the Bush tax cuts expire would have on dividend investors. I personally feel that it should be discussed. I’m certainly not saying that all of the Bush tax cuts should be renewed, don’t get me wrong. There is certainly something to be said for trying to get back to a balanced budget and while I do think that the vast majority of that should be done through spending cuts, there needs to be tax hikes and a general closing of the loopholes that make it so difficult these days to ensure a fair taxing system.
That being said, if the current dividend taxes that the Bush tax cuts took down to 15% do end up expiring, that will mean major changes for everyone that pays over 15% of income taxes (vast majority of you I would assume?). Now of course, this would only apply to dividends paid out in taxable accounts so some dividends that we own would not see any impacts. But what about everything else?
Who Is Being Impacted Directly?
These Bush tax cuts are often simplified in the media as being “taxes for wealthy”. I don’t think someone in the 25% tax bracket would necessarily consider themselves “wealthy”, at least most of them. Yes, I know, a large portion of those being impacted are more wealthy investors, the so-called 1%. That is even more true if you look at the dollar amounts that are being impacted
One thing I do not know is how funds such as dividend ETF’s would be impacted by such changes. Would such an ETF end up paying much more in taxes and thus have to pass on those taxes to the investor? I’m honestly not sure how that part works but would love to hear from anyone who does.
The point of taxing those investors more should not be about how much they are making but about if the tax increase is fair or not.
This Will Impact YOU As Well
Yes you heard me, no matter what tax bracket you are in, I think this could have a major impact. Why? Because the fact that many investors will have less of an advantage in receiving dividends would give less incentives for companies to pay them out. That could end.
“Unfair” Tax Increase?
The biggest point for me, especially when dividend taxes are concerned is the fact that the reason these tax cuts were made in the first place was to diminish double taxation. If you are not aware, the double taxation comes from the fact that the companies pay out amounts on which they’ve already paid taxes, “after tax earnings”. That is why many including myself believe that dividends should be taxed at a minimal rate if at all, to diminish this double taxation. The fact that some investors will end up paying nearly 40% of taxes on those dividend revenues after the company also paid taxes on those amounts seems unfair.
What are your thoughts on these dividend tax increases? Do you expect them to impact you in any way? Do you think they are right?