Taxes on Dividend Income Could Rise as High as 43.4% After the Fiscal Cliff

The media has been inundated with the Fiscal Cliff recently, however, I am shocked how little attention the increase in taxes owed on qualified dividends has received.  As it stands today, dividend income could rise from 15% to as high as 43.4%!  Truth be told, I am pretty sure as this post gets buried in my archives looking back at it in a year it will look silly as I believe that those elected will get their act together.  Notwithstanding I think it is important to talk about what could happen come January 1, 2013 to dividends if for no other reason to see how the market reacts.

Calculating the Top Dividend Income Rates 2013

Part of the fiscal cliff is the change from dividends being taxed at capital gains rates to ordinary income rates.  This means instead of a top tax rate of 15% (Capital Gains) we are looking at the following possible income tax scenarios as presented by Forbes:

Scenario 1: Tax cuts under the extension of the Bush-era tax cuts for all

Rate Single Filers Married Joint Filers Head of Household Filers
10% $0 to $8,950 $0 to $17,900 $0 to $12,750
15% $8,950 to $36,250 $17,900 to $72,500 $12,750 to $48,600
25% $36,250 to $87,850 $72,500 to $146,400 $48,600 to $125,450
28% $87,850 to $183,250 $146,400 to $223,050 $125,450 to $203,150
33% $183,250 to $398,350 $223,050 to $398,350 $203,150 to $398,350
35% $398,350 and up $398,350 and up $398,350 and up

Scenario 2: Tax brackets under the expiration of the Bush-era tax cuts for all

Rate Single Filers Married Joint Filers Head of Household Filers
15% $0 to $36,250 $0 to $60,550 $0 to $48,600
28% $36,250 to $87,850 $60,550 to $146,400 $48,600 to $125,450
31% $87,850 to $183,250 $146,400 to $223,050 $125,450 to $203,150
36% $183,250 to $398,350 $223,050 to $398,350 $203,150 to $398,350
39.60% $398,350 and up $398,350 and up $398,350 and up

Scenario 3: Tax brackets under the expiration of the Bush-era tax cuts for high-income

Rate Single Filers Married Joint Filers Head of Household Filers
10% $0 to $8,950 $0 to $17,900 $0 to $12,750
15% $8,950 to $36,250 $17,900 to $72,500 $12,750 to $48,600
25% $36,250 to $87,850 $72,500 to $146,400 $48,600 to $125,450
28% $87,850 to $183,250 $146,400 to $223,050 $125,450 to $203,150
33% $183,250 to $203,600 $223,050 to $247,000 $203,150 to $227,300
36% $203,600 to $398,350 $247,000 to $398,350 $227,300 to $398,350
39.60% $398,350 and up $398,350 and up $398,350 and up

 

As highlighted if we were to look at a middle class family in an situation where the Bush tax cuts expired completely their marginal tax rate on their dividends could be 28%! That is a huge increase from the current 15%.

In addition , there are those few that will be effected by Obama’s health care tax.  Put simply by Bloomberg BNA,

…In 2013, individual taxpayers making over $200,000 annually ($250,000 for married individuals who are filing jointly) will be subject to increased Medicare tax rates (2.35%, up from 1.45%) and an “unearned income” healthcare surtax of 3.8% on all interest, dividend, capital gain, and passive business income.

To quantify if someone where in the top tax bracket in 2012 his dividends would have been taxed at 15%.  That same person would have those same dividends taxed at their ordinary income tax rate 39.6% and then they would have the 3.8% Obamacare surtax tacked on to it.

Will I be Changing My Dividend Investing Strategy if we Fall off the Fiscal Cliff?

In a word No.  It is likely that my Family’s income won’t be over $250,000 in 2013 so the Obamacare surtax doesn’t really affect me.  Notwithstanding if my marginal tax rate keeps increasing in the years to come I may have to come back to this topic.

Will your Dividend investment strategy change if the Bush tax cuts expire?

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