For the past seven years, dividends have enjoyed a Federal tax rate of 15%. This is all about to change under the new health care bill. The new bill adds an additional 3.8% Medicare tax to all dividends, interest, capital gains, annuities, royalties, and rental income for all joint taxpayers with adjusted gross income of $250,000 and single taxpayers with adjusted gross income of $200,000. This will begin in 2013. In addition, if the current tax law reverts back to the 2000 tax system and rate schedules at the end of 2010, as they are currently scheduled to do, assuming no new tax legislation is passed, dividend income will no longer be taxed as a special category of income but will be included as ordinary income. The top tax rate on ordinary income beginning in 2011 is scheduled to be 39.6%. This means that in 2013, dividends become ordinary income and federal taxes will total 43.40%. Add an additional 6% tax for the state of Georgia and your dividends will be taxed at a whopping 49.40%. Overall, this could represent a 289% tax increase on dividends.
Guess who pays for the new health care system??
What impact will this have on dividend paying stocks? Would investors shy away from dividend paying companies and invest in those that pay no dividends? This could drive down the value of some of the best companies in the country.