Just When Dividends Start Up - The Tax Man Cometh

Posted by: Howard Silverblatt on May 4, 2010

Depending on the events in Washington, there is a possibility of a large tax gap in qualified dividends paid in 2010 vs. 2011. Without a congressional dividend tax law change a $1 qualified dividend paid in December nets you $0.85 after Federal taxes, vs. the $0.615 you would net in January 2011 (not counting a potential med tax). The variance is due to the expiration of the Bush tax cut on qualified dividends (very simply put, if the company pays federal taxes on the earned income, the dividends are qualified). The ‘86 Tax Reform Act was the reverse, with tax rates in the forward years going down, and we saw some companies delay their Q4 payment until early January to permit investors to keep more of their dividend dollar. Now we could see the reverse, with companies making January 2011 payments in December 2010, again to permit investors to keep more of what they are paid. I counted 41 issues in the S&P 500 that paid $4.0B in the first 10 days of January 2010, which calculates out to $940 millions which could remain in investor’s pockets if paid a few weeks early in fiscal 2010.
Year-end is a long time from now, but there does appear to be a slight desire for additional revenue (and don’t forget some states tax on a percentage of federal tax) and a slight desire not to cut programs (just slight). While predicting the market is easy compared to predicting politics, in the current environment of pay-as-you-go and revenue/expenditure neutrality, the 15% dividend tax could be classified as endangered species. Under several current floating plans rates could go to 20% or 28%, and without any congressional action it will go to 38.5%, and that is before any potential medical tax surcharge.

see file for additional dividend data
dividend_tax.doc

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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