Tax Reform May Increase Taxes on Dividends

Email  Print Print  

As we age, we learn to love a certain part of our investment portfolio more and more. When we’re young, full of life, and willing to take big risks, we’re happy to have those high energy momentum stocks and aggressive stock funds that include stocks like Apple that can’t seem to stop going up. As we get older we figure out that we can’t take as many chances with our retirement money as we once did.

That’s when the dividend payers like Johnson and Johnson, Exxon, Pfizer, and Microsoft, just to name a few, start to look a lot more attractive. As we reach retirement age, we may depend on these dividend payers to supply income for living expenses when working is no longer an option.

This is why recent proposals by the Obama Administration have financial advisers as well as income investors worried. How could the recent corporate tax cut proposal affect your portfolio?

The Proposal

The proposal to cut the corporate tax rate from 35% to 28% makes sense in light of America having the highest corporate tax rate of any advanced economy but along with that cut, Obama wants to cut out many of the corporate loopholes as well as raise the tax on dividends. In reality, larger corporations pay closer to 18% after the deductions, credits, and exemptions are applied to their taxable income but this proposal could effectively raise the rate.

The Impact

Movements like Occupy Wall Street want to see corporations pay their fair share of taxes but for corporations who are paying dividends to shareholders, more tax could mean less in dividends, according to Forbes. Not only would the business face potentially higher taxes, the tax on dividends could see a substantial increase. Right now, the dividend tax is 15% but that rate could more than double in a worst case scenario leaving that dividend subject to double taxation and severely eating in to the money retirees have to live on.

More Risk

If the income stream from dividends were to dry up, investors would be forced to take on more risk for both themselves and their clients if they are money managers. As we know from the events of 2008 and 2009, taking on extra risk could potentially have disastrous results for a portfolio and with treasuries at historic lows, income investors aren’t likely to find the income they need from government debt.

What to Do

First, the new corporate tax legislation has little chance of becoming law any time soon and especially not in an election year. Next, with the upcoming Taxmageddon looming at the end of this year, it’s unlikely that Washington would allow taxes for Americans to rise substantially just as the economic recovery is showing signs of staying power.

That may change in the future, though. Investors are advised to not put all of their financial eggs in the basket of dividend stocks. If you are young or middle aged, ratcheting up the aggressiveness in your portfolio, even a little, may help to make up for any potential loss in dividends as you enter retirement age.

Remember that there is always news and rumors coming from Washington as well as the investment markets but for now, investors are well advised to stay the course and only make small scale changes to their investing philosophy and as always, get help from a trusted and qualified financial adviser.

{ 4 comments, please add your thoughts now! }

Related Posts

RSS Subscribe Like this article? Get all the latest articles sent to your email for free every day. Enter your email address and click "Subscribe." Your email will only be used for this daily subscription and you can unsubscribe anytime.

4 Responses to “Tax Reform May Increase Taxes on Dividends”

  1. Tim,

    This is an interesting development. I definitely like the idea of dividend paying stocks for retirees.

    This should not impact younger investors though. Theoretically, non-dividend paying funds and dividend-paying funds(with div. reinvested) should return the same rate of growth over extended periods of time. Currently there are no concrete reasons(only opinions like companies are more responsible if they pay div) for long term dividend investment, but if taxes were increased that would definitely make me lean towards non-dividend paying funds.

  2. That Forbes article was painfully awful to read. Not enough loopholes will be closed to have a material impact on the taxes corporations pay. It’s just designed to make the US look more competitive internationally.

    Forbes also assumes that any change in the dividend tax will result in less people investing in dividend stocks. There is no cited research saying this has happened before, it is rhetoric. Another assumption: even if people leave dividend stocks they will buy other stocks increasing volatility. Are the retirees the author is speaking to day traders? Will they become them?

    Finally, the Forbes article says that 42% of dividend income was reported by senior citizens, so any change for them is robbing them of retirement. The author did not point out that even for seniors, dividend income accounted for just 6% of their total AGI.

  3. Shorebreak says:

    The current tax code is an abomination that requires simplification. All income should be taxed at the same rate, regardless the source.

  4. timparker says:

    I’ve seen my fair share of articles like the Forbes piece and we’ve all heard the coming fallout of legislative changes. Often, the terrible fallout doesn’t happen because the markets are so efficient at digesting and correcting for changes in the law.

Please Leave a Reply
Bargaineering Comment Policy

Previous Article: «
Next Article: »
Advertising Disclosure: Bargaineering may be compensated in exchange for featured placement of certain sponsored products and services, or your clicking on links posted on this website.
About | Contact Me | Privacy Policy/Your California Privacy Rights | Terms of Use | Press
Copyright © 2016 by All rights reserved.