Millions of Americans invest in corporate equities directly or through taxable mutual funds. According to a report by Ernst and Young, 31 percent of tax returns with qualified dividends belong to investors age 50-64, and 32 pecent belong to investors age 65 and older.
Some companies offer a dividend, or a payment of corporate profits among shareholders. The dividends are usually issued quarterly. Investors can either take the money paid out on the dividends or reinvest them in the company.
Many times, senior citizens choose to invest in companies that offer dividends because their main investing goal is capital preservation and income. Because of the appeal of dividends to seniors, this is a group that would be affected, perhaps the most, by a tax increase on dividends.
Tax rates currently in place, through December 31, 2012:
- 15 percent maximum tax rate on qualified dividend income
- 15 percent maximum tax rate on long-term capital gains
- Taxpayers in the 10 percent and 15 percent tax brackets currently are not taxed on qualified dividend income or capital gains
The tax rates that are in place currently are the tax cuts that have been in place since 2003 when Congress passed the Jobs and Growth Tax Reconciliation Act. Congress extended these tax cuts again in 2006 and 2010.
If Congress does nothing, these tax cuts will expire at the end of this year and dividends will again, be taxed as ordinary income, which could be as high as 39.6 percent. The healthcare act (passed in 2010) also imposes a 3.8 percent Medicare tax on all investment income beginning in 2013 for households earning more than $250,000 ($200,000 for single filers), which would result in these dividends being taxed at a rate of 43.4 percent.
Tax rates, effective January 1, 2013:
- 39.6 percent maximum tax rate for qualified dividend income
- 20 percent maximum tax rate on long-term capital gains
If these tax cuts actually expire and the higher rates go into effect, many investors are going to take a huge hit to their budget, especially those on fixed income. The House of Representatives passed a measure to extend all current individual tax cuts, the Senate has passed a measure to raise taxes on wealthy households, making more than $250,000 per year. While the outcome of whether Congress will come together and agree on a course of action is uncertain, one thing is sure; this will continue to be a debate topic of this presidential election year.