Hat tip goes to reader Delo for pointing to Forbes’ article “They’re Clipping Your Dividends.” Let’s look at some highlights:
If you are a prosperous saver, the federal tax rate on your dividends is about to triple. What are you going to do about it?
You didn’t know about this tripling? Pay attention. There has been a great transformation in fiscal policy. Congress has decided to bail out deadbeats and condo flippers, and to finance this generosity by taxing marriage, work and savings. Ashlea Ebeling describes the first two assaults in The Obama Tax Hikes–What to Do. Let’s now consider savings–specifically, four ways in which dividend earners will be punished.
Come next January the favorable 15% rate on dividends will expire, making them subject to taxation as “ordinary income.” At the same time the maximum rate is kicking up from 35% to 39.6%. The third thing that will happen in 2011 is the resurrection of a rule that ostensibly limits deductions but for the majority of taxpayers is nothing but a boost in their tax bracket. This rule adds 1.2 percentage points to your rate.
In 2013 comes a fourth tax increase: a 3.8% surtax on investment income. Add it up. Dividends that used to be taxed at 15% are set to be taxed at 44.6%.
What are you going to do? Here are two tips, both from Robert Gordon of Twenty-First Securities Corp. He spends his days devising tax-efficient trading strategies for wealthy people, but some of his ideas are applicable to folks of modest means, which we will define as $1 million in the market.
The first is to sell all your preferreds, utilities and other high-yielding stocks. Sell even the ones in your tax-sheltered accounts. When the reality of higher taxes sinks in, these stocks will come under selling pressure.
The second thing to do is to get back into these stocks after the selling wave is over, but do it using a derivative that allows you to duck the tax. That derivative is a single-stock future. You contract now to buy a share that will be delivered to you some months hence.
While I appreciate the 2 solutions to the problem, I can’t see a not very sophisticated retired person getting involved with single-stock futures.
The other area that was not discussed was the fact that many dividend investors are not earning enough to push them in a high tax bracket, so the actual effect might not be as bad.
Nevertheless, tax increases are on the horizon, and I suggest that, if you are concerned, you meet with a competent tax advisor to discuss your personal situation. Many details are still not known so you may want to tackle this task later on this year.