Proposed Dividend Tax Is As Uninformed As It Is Naive [View article]
An update from the WSJ: Tax planning is seldom simple, but lately it has been next to impossible. At year's end, a host of temporary provisions expire, and lawmakers have put forth radically different proposals for what to do next. Throw in an election year, and predictions become all the more difficult. For the confused, here is what is clear (not much) and unclear (a great deal) about tax rates in 2013, plus expert guesses about what will actually happen. The current rates expire at year-end. The top rate of 35% will rise to 39.6%, and millions of poor and middle-income taxpayers removed from the tax rolls by the "Bush tax cuts" of 2001-3 will again owe income taxes. A limit on itemized deductions adding up to 1.2 percentage points to the tax rate will return as well. Next year also brings a new 0.9% Medicare tax on wages for most joint filers with adjusted gross income above $250,000 ($200,000 for single filers). The tax will apply to the income above the threshold, not below. President Obama's budget seeks to retain current tax rates for people in lower brackets and let them expire for most joint filers with adjusted gross incomes of more than $250,000 ($200,000 single). It also would cap the value of itemized deductions for people in higher brackets. Obama's budget also calls for replacing the alternative minimum tax, which imposes extra tax on people with big deductions, with a different levy. Known as the "Buffett rule," because billionaire Warren Buffett has famously noted that his tax rate is lower than that of his secretary, the proposal would subject people making more than $l million to an average tax rate of no less than 30%. The president's budget offered no projections on how much the new tax would collect or details on how it would work. Lawmakers in the House and Senate each have their own version of a tax based on the Buffett rule, called the "Pay a Fair Share Act," with the same 30% and $1 million thresholds. According to Roberton Williams of the nonpartisan Tax Policy Center, Congress's version would raise $20 billion in 2015 from 116,000 taxpayers -- assuming no one changed behavior, which many would. By contrast, the AMT has been raising some $40 billion a year from 4 million taxpayers. The current investment-tax rates also expire at the end of this year. The top 15% rate on long-term capital gains (those held over a year) will rise to 20%, and the current 0% rate for those in the bottom two tax brackets will rise to 10%. Qualified dividends will again be taxed as ordinary income, with a top rate of 39.6%. In 2013 a new 3.8% tax on investment income debuts for most joint filers with adjusted gross income above $250,000 ($200,000, single). It covers capital gains, dividends, rents and royalties, among other things. It doesn't apply to gains from home sales unless the gains exceed the cap of $250,000 (for single filers) or $500,000 (joint filers). Obama favors letting the top 15% rate on capital gains rise to 20%. New this year is a proposal to tax dividends like ordinary income for those with adjusted gross income above $250,000 ($200,000 for single filers). In addition, both he and the lawmakers sponsoring the Buffett-rule proposal would like to see investment income taxed at an average rate of 30% for people earning more than $1 million. The current rules expire at year-end. The $5 million-per-individual estate-tax exemption will drop to $1 million, and the top estate-tax rate will rise from 35% to 55% for most and 60% for some. The gift-tax exemption will fall to $1 million and the rate will rise to 55%. Obama wants to return these taxes to 2009 levels. That would mean an estate-tax exemption of $3.5 million and a gift-tax exemption of $1 million. The top rate for both would be 45%. It is an election year and much depends on what happens Nov. 6. Most tax experts believe Congress won't address tax rates before the election -- although legislation is notoriously unpredictable. All the proposals mentioned above, plus others, are in play. After Nov. 6, the current Congress might pass another temporary extension, as happened in late 2010, says Clint Stretch, a principal at Deloitte Tax in Washington: "A straight extension of the current system will be the path of least resistance, especially if it comes with a promise of tax reform in 2013." On the other hand, says Michael Graetz, a former top Treasury official now teaching at Columbia University's Law School, the election results could mean that "for 'millionaires and billionaires' with more than $250,000 of income, there may be a substantial tax increase."
Proposed Dividend Tax Is As Uninformed As It Is Naive [View article]
We all need to think about what happens to a dividend dollar: 1. A corporation’s earnings are taxed. 2. An investor’s wages are taxed. 3. The dividend is taxed. 4. The dividend is spent and taxed. 5. Depending on what you bought there could be yet other taxes. 6. Perhaps you had to pay to park, another tax. 7. Perhaps you paid a toll on the way to/from the store, another tax. 8. You return home to pay your real estate tax. 9. You die and your estate pays federal tax. 10. The estate pays state tax.
Proposed Dividend Tax Is As Uninformed As It Is Naive [View article]
It’s best that we agree that we disagree. I have two questions that hopefully inspire thought about the challenges our country faces. First, if you had a son or daughter that was addicted to heroin, would you increase their allowance? Secondly, Thomas Edison said: “If your actions inspire others to dream more, learn more, do more and become more, you are a leader.” Has Obama inspired you to dream, learn, do or be more - or has he told you it would be fair to take more?
Proposed Dividend Tax Is As Uninformed As It Is Naive [View article]
Yes. Yours is the best idea in the whole thread. Reading through the emotional and unknowledgeable f*** the rich posts I was remind of a Martin Luther King, Jr. quote: “Nothing in the world is more dangerous than sincere ignorance and conscientious stupidity."
What Smart Investors Buy For High Yields [View article]
Avi - I always look forward to your articles. In reading this latest one I see that you are recommending REITs for taxable accounts. My opinion is that REITs should generally not be in taxable accounts, as they are relatively tax-inefficient. Investors are required to pay ordinary income tax on the REIT dividends they receive, not the reduced tax rate on “qualified” dividends. Therefore, it makes more sense to hold REITs in a 401(k) or IRA, rather than a regular taxable account. Conversely, I think that it is better to hold MLPs in a taxable account and not in a 401(k) or IRA because a portion of their payouts can be tax-deferred already.
I just wanted to get clarification on this quickly - I’ll go back and continue reading your article...
Focusing On Dividends Alone Remains A Big Mistake [View article]
I was just trying to point out that there are many variables that effect investment decisions. See my long post above. Like it or not, when making an investment you are in some sense playing what if. Right now, we don't know if we are going to get Draconian cuts on defense spending, what the regulatory environment or tax rates will look like in 2013, what is permissible in M&A, will the US have an energy policy, or whether Obama Care will be repealed. All of this uncertainty makes investment decisions difficult for corporations and individuals.
Focusing On Dividends Alone Remains A Big Mistake [View article]
Just saw an excellent interview on CNBC about how Obama is pushing people investing for retirement, or in retirement, into riskier investments by proposing to raise dividend tax rate with interest rates near zero. If you missed it, hopefully you can watch on their website.
Accumulating Dividend Stocks Is A Long-Term Process [View article]
A similar axiom to: “The best thing about a democracy is that everyone gets to vote and the worst thing about a democracy is that everyone gets to vote.” can be said about DGI. The best thing about DGI is the steady, reliable, predictable, and rising income and the worst thing about DGI is what to invest the steady, reliable, predictable, and rising income in. All in all, not a bad problem to have! I prefer the active reinvestment approach to the DRIP approach but an investor just getting started may find DRIP superior because they are not yet receiving enough cash to make new cost effective investments. Keeping track of the cost basis in excel isn’t difficult. Good luck to you and welcome to DGI!
Focusing On Dividends Alone Remains A Big Mistake [View article]
If your capital gains tax rate was 10% and your dividend tax rate was 50% would your opinion change? What's important is your after tax return adjusted for inflation (a further complication).
Focusing On Dividends Alone Remains A Big Mistake [View article]
Too true. My experience indicates corporate managers don't often make good investors. From your other posts I think we also agree that the Government needs to reduce spending and stop stealing our hard earned money.
Focusing On Dividends Alone Remains A Big Mistake [View article]
The question of whether to prefer buybacks or dividends has to be answered on an individual basis. There is no right or wrong answer to the question. Individuals must decide on the purpose for investment of their hard earned dollars. Generally, an investor falls into one of three camps:
(1) This investor is seeking income and looks for companies that maintain a relatively high dividend payout ratio with stable to increasing dividends. Their preference would be for mature companies that allocate extra earnings to dividends with minimal to no stock buybacks. Historically, such companies often attracted investors with low marginal tax rates because taxes are due as the dividends are received.
(2) This investor is not seeking current income and would probably seek companies that retain a relatively large percentage of their earnings. As such they are more concerned with earning trends than with dividends. Buybacks of outstanding shares enhance earnings per share so buybacks are seen as positive actions for the company’s extra cash. These companies are generally younger and attract investors who often have high marginal tax rates.
(3) This investor is a hybrid of the first two and desires a balance of income and growth. As such they are looking for return from dividends and capital appreciation. Most investors fall into this camp and would desire companies that use their extra cash prudently. These companies would maintain a moderate dividend payout ratio and buyback shares only when they are attractively priced.
There are many factors that affect investor and company decisions:
(1) An increase in the personal income tax rates would make it more desirable for the company to retain and reinvest earnings. Consequently, an increase in personal tax rates should lower the dividend payout ratio and favor buybacks.
(2) A lowering of the capital gains tax rate would make capital gains more attractive to tax-paying investors. Thus, dividend payout ratios would probably decline. A lowering of the dividend tax rate would have the opposite effect.
(3) An increase in the corporate tax rate would, other factors held constant, reduce the amount of after-tax earnings available for dividends. Even though the amount of dividends would decrease, the payout ratio would probably remain constant, or even increase if management does not reduce the dividend amount in proportion to the reduction in after-tax earnings.
(4) If interest rates increase, the increase would make retained earnings a relatively attractive way of financing new investment. Consequently, the payout ratio might be expected to decline.
(5) A non-cyclical increase in profits would probably lead to an increase in dividends, but not necessarily to an increase in the payout ratio.
(6) If investment opportunities for companies decline while cash inflows remain relatively constant, the payout ratio would most likely increase.
Focusing On Dividends Alone Remains A Big Mistake [View article]
Good point. Dividends favor investors while buybacks favor traders. CNBC keeps talking about how individual investors haven't returned to the market. Another big factor is that investment is required for capital formation and tax rates will certainly effect that too.
Proposed Dividend Tax Is As Uninformed As It Is Naive [View article]
For the confused, here is what is clear (not much) and unclear (a great deal) about tax rates in 2013, plus expert guesses about what will actually happen.
The current rates expire at year-end. The top rate of 35% will rise to 39.6%, and millions of poor and middle-income taxpayers removed from the tax rolls by the "Bush tax cuts" of 2001-3 will again owe income taxes.
A limit on itemized deductions adding up to 1.2 percentage points to the tax rate will return as well.
Next year also brings a new 0.9% Medicare tax on wages for most joint filers with adjusted gross income above $250,000 ($200,000 for single filers). The tax will apply to the income above the threshold, not below.
President Obama's budget seeks to retain current tax rates for people in lower brackets and let them expire for most joint filers with adjusted gross incomes of more than $250,000 ($200,000 single). It also would cap the value of itemized deductions for people in higher brackets.
Obama's budget also calls for replacing the alternative minimum tax, which imposes extra tax on people with big deductions, with a different levy. Known as the "Buffett rule," because billionaire Warren Buffett has famously noted that his tax rate is lower than that of his secretary, the proposal would subject people making more than $l million to an average tax rate of no less than 30%.
The president's budget offered no projections on how much the new tax would collect or details on how it would work.
Lawmakers in the House and Senate each have their own version of a tax based on the Buffett rule, called the "Pay a Fair Share Act," with the same 30% and $1 million thresholds.
According to Roberton Williams of the nonpartisan Tax Policy Center, Congress's version would raise $20 billion in 2015 from 116,000 taxpayers -- assuming no one changed behavior, which many would. By contrast, the AMT has been raising some $40 billion a year from 4 million taxpayers.
The current investment-tax rates also expire at the end of this year. The top 15% rate on long-term capital gains (those held over a year) will rise to 20%, and the current 0% rate for those in the bottom two tax brackets will rise to 10%.
Qualified dividends will again be taxed as ordinary income, with a top rate of 39.6%.
In 2013 a new 3.8% tax on investment income debuts for most joint filers with adjusted gross income above $250,000 ($200,000, single).
It covers capital gains, dividends, rents and royalties, among other things. It doesn't apply to gains from home sales unless the gains exceed the cap of $250,000 (for single filers) or $500,000 (joint filers).
Obama favors letting the top 15% rate on capital gains rise to 20%. New this year is a proposal to tax dividends like ordinary income for those with adjusted gross income above $250,000 ($200,000 for single filers).
In addition, both he and the lawmakers sponsoring the Buffett-rule proposal would like to see investment income taxed at an average rate of 30% for people earning more than $1 million.
The current rules expire at year-end. The $5 million-per-individual estate-tax exemption will drop to $1 million, and the top estate-tax rate will rise from 35% to 55% for most and 60% for some. The gift-tax exemption will fall to $1 million and the rate will rise to 55%.
Obama wants to return these taxes to 2009 levels. That would mean an estate-tax exemption of $3.5 million and a gift-tax exemption of $1 million. The top rate for both would be 45%.
It is an election year and much depends on what happens Nov. 6. Most tax experts believe Congress won't address tax rates before the election -- although legislation is notoriously unpredictable. All the proposals mentioned above, plus others, are in play.
After Nov. 6, the current Congress might pass another temporary extension, as happened in late 2010, says Clint Stretch, a principal at Deloitte Tax in Washington: "A straight extension of the current system will be the path of least resistance, especially if it comes with a promise of tax reform in 2013."
On the other hand, says Michael Graetz, a former top Treasury official now teaching at Columbia University's Law School, the election results could mean that "for 'millionaires and billionaires' with more than $250,000 of income, there may be a substantial tax increase."
Proposed Dividend Tax Is As Uninformed As It Is Naive [View article]
1. A corporation’s earnings are taxed.
2. An investor’s wages are taxed.
3. The dividend is taxed.
4. The dividend is spent and taxed.
5. Depending on what you bought there could be yet other taxes.
6. Perhaps you had to pay to park, another tax.
7. Perhaps you paid a toll on the way to/from the store, another tax.
8. You return home to pay your real estate tax.
9. You die and your estate pays federal tax.
10. The estate pays state tax.
I wish it was only twice!
Proposed Dividend Tax Is As Uninformed As It Is Naive [View article]
Proposed Dividend Tax Is As Uninformed As It Is Naive [View article]
What Smart Investors Buy For High Yields [View article]
I just wanted to get clarification on this quickly - I’ll go back and continue reading your article...
Focusing On Dividends Alone Remains A Big Mistake [View article]
Focusing On Dividends Alone Remains A Big Mistake [View article]
Focusing On Dividends Alone Remains A Big Mistake [View article]
Accumulating Dividend Stocks Is A Long-Term Process [View article]
Focusing On Dividends Alone Remains A Big Mistake [View article]
Focusing On Dividends Alone Remains A Big Mistake [View article]
Focusing On Dividends Alone Remains A Big Mistake [View article]
(1) This investor is seeking income and looks for companies that maintain a relatively high dividend payout ratio with stable to increasing dividends. Their preference would be for mature companies that allocate extra earnings to dividends with minimal to no stock buybacks. Historically, such companies often attracted investors with low marginal tax rates because taxes are due as the dividends are received.
(2) This investor is not seeking current income and would probably seek companies that retain a relatively large percentage of their earnings. As such they are more concerned with earning trends than with dividends. Buybacks of outstanding shares enhance earnings per share so buybacks are seen as positive actions for the company’s extra cash. These companies are generally younger and attract investors who often have high marginal tax rates.
(3) This investor is a hybrid of the first two and desires a balance of income and growth. As such they are looking for return from dividends and capital appreciation. Most investors fall into this camp and would desire companies that use their extra cash prudently. These companies would maintain a moderate dividend payout ratio and buyback shares only when they are attractively priced.
There are many factors that affect investor and company decisions:
(1) An increase in the personal income tax rates would make it more desirable for the company to retain and reinvest earnings. Consequently, an increase in personal tax rates should lower the dividend payout ratio and favor buybacks.
(2) A lowering of the capital gains tax rate would make capital gains more attractive to tax-paying investors. Thus, dividend payout ratios would probably decline. A lowering of the dividend tax rate would have the opposite effect.
(3) An increase in the corporate tax rate would, other factors held constant, reduce the amount of after-tax earnings available for dividends. Even though the amount of dividends would decrease, the payout ratio would probably remain constant, or even increase if management does not reduce the dividend amount in proportion to the reduction in after-tax earnings.
(4) If interest rates increase, the increase would make retained earnings a relatively attractive way of financing new investment. Consequently, the payout ratio might be expected to decline.
(5) A non-cyclical increase in profits would probably lead to an increase in dividends, but not necessarily to an increase in the payout ratio.
(6) If investment opportunities for companies decline while cash inflows remain relatively constant, the payout ratio would most likely increase.
Kimberly-Clark: A Good Buy After A Pullback [View article]
Focusing On Dividends Alone Remains A Big Mistake [View article]
Focusing On Dividends Alone Remains A Big Mistake [View article]