Taxation of Dividends after 2010

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LTAccumulator
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Taxation of Dividends after 2010

Post by LTAccumulator »

Can someone clarify, without getting into politics, what the CURRENT PROPOSAL is regarding taxation of dividends for 2011. One place I heard "ordinary income rates" across the board and in another place I heard "same as now (max 15%) for income amounts under $250,000 THEN THE EXCESS at ordinary income tax rates." 
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Toons
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Post by Toons »

"In his 2011 budget, the President has proposed making permanent the zero and 15 percent rates on dividends and capital gains for couples filing jointly with income of up to $250,000 and for other taxpayers with income of up to $200,000. For taxpayers with income above those limits, the President proposes a tax rate of 20 percent on dividends and capital gains."

http://www.cbo.gov/ftpdocs/112xx/doc112 ... dixA.shtml

:D
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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LTAccumulator
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Post by LTAccumulator »

Thank you. But that is still somewhat unclear. From what you wrote, it sounds like ALL cap gains and dividends will be taxed at the higher rate if a couples income is $250001 but NONE of that will be taxed at the higher rate if their income is $249999.

Oh and if passed, do these amounts adjust for inflation in future years?F
grok87
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Post by grok87 »

LTAccumulator wrote:Thank you. But that is still somewhat unclear. From what you wrote, it sounds like ALL cap gains and dividends will be taxed at the higher rate if a couples income is $250001 but NONE of that will be taxed at the higher rate if their income is $249999.

Oh and if passed, do these amounts adjust for inflation in future years?F
i think the new healthcare law will add 3.4% to the rate-so 23.4% is my best guess...
cheers,
RIP Mr. Bogle.
sscritic
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Post by sscritic »

LTAccumulator wrote:Thank you. But that is still somewhat unclear. From what you wrote, it sounds like ALL cap gains and dividends will be taxed at the higher rate if a couples income is $250001 but NONE of that will be taxed at the higher rate if their income is $249999.

Oh and if passed, do these amounts adjust for inflation in future years?F
We have a graduated income tax system. Different dollars are taxed at different rates, depending on whether they are first dollars or last dollars.

For example, using the current law, if you are a married couple with no income other than $100,000 of qualified dividends and you take the standard deduction and two exemptions, your taxable income on form 1040 line 43 is $81,300. If you then go through the Qualified Dividends and Capital Gain Tax Worksheet—Line 44 in the 1040 instructions, you will find that your tax is $2010. This is not 15% of your $100,000 of income, nor 15% of your $81,300 of taxable income. It is 15% of the amount by which $81,300 exceeds $67,900 (or $13,400). Most of your dividends were taxed at 0%. Only the last $13,400 were taxed at 15%.

Note that $67,900 is the beginning of the 25% bracket. Only when you reach the 25% ordinary bracket do your dividends become taxable.

I would expect the same behavior under the proposal. If you have $300,000 in dividends and no other income, the first $67,900 will not be taxed at all, the next $182,100 will be taxed at 15%, and any dividends above $250,000 reduced by your deductions and exemptions would be taxed at the proposed 20% rate. Just my guess as to the meaning of the short-hand quoted
the President has proposed making permanent the zero and 15 percent rates on dividends and capital gains for couples filing jointly with income of up to $250,000 and for other taxpayers with income of up to $200,000. For taxpayers with income above those limits, the President proposes a tax rate of 20 percent on dividends and capital gains.
The 15% rate is a marginal rate, not a flat rate. I expect the proposed 20% rate is also a marginal rate, not a flat rate. That's just the way people talk about tax rates, don't you?
grok87
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Post by grok87 »

sscritic wrote:
LTAccumulator wrote:Thank you. But that is still somewhat unclear. From what you wrote, it sounds like ALL cap gains and dividends will be taxed at the higher rate if a couples income is $250001 but NONE of that will be taxed at the higher rate if their income is $249999.

Oh and if passed, do these amounts adjust for inflation in future years?F
We have a graduated income tax system. Different dollars are taxed at different rates, depending on whether they are first dollars or last dollars.

For example, using the current law, if you are a married couple with no income other than $100,000 of qualified dividends and you take the standard deduction and two exemptions, your taxable income on form 1040 line 43 is $81,300. If you then go through the Qualified Dividends and Capital Gain Tax Worksheet—Line 44 in the 1040 instructions, you will find that your tax is $2010. This is not 15% of your $100,000 of income, nor 15% of your $81,300 of taxable income. It is 15% of the amount by which $81,300 exceeds $67,900 (or $13,400). Most of your dividends were taxed at 0%. Only the last $13,400 were taxed at 15%.

Note that $67,900 is the beginning of the 25% bracket. Only when you reach the 25% ordinary bracket do your dividends become taxable.

I would expect the same behavior under the proposal. If you have $300,000 in dividends and no other income, the first $67,900 will not be taxed at all, the next $182,100 will be taxed at 15%, and any dividends above $250,000 reduced by your deductions and exemptions would be taxed at the proposed 20% rate. Just my guess as to the meaning of the short-hand quoted
the President has proposed making permanent the zero and 15 percent rates on dividends and capital gains for couples filing jointly with income of up to $250,000 and for other taxpayers with income of up to $200,000. For taxpayers with income above those limits, the President proposes a tax rate of 20 percent on dividends and capital gains.
The 15% rate is a marginal rate, not a flat rate. I expect the proposed 20% rate is also a marginal rate, not a flat rate. That's just the way people talk about tax rates, don't you?
sscritic,
I hope you are right but fear you are wrong. I belive the new 20% rate will apply to all dividends for those earning above $200k in income.
cheers,
RIP Mr. Bogle.
sscritic
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Post by sscritic »

grok87 wrote: sscritic,
I hope you are right but fear you are wrong. I belive the new 20% rate will apply to all dividends for those earning above $200k in income.
cheers,
But you changed the question. :)

My example had no earned income, only dividend income. If you have $250,000 of earned income after reductions for deductions and exemptions and another $200,000 of dividend income (total income of $450,000), the $200,000 of dividend income will be taxed at the marginal rate of 20% because it is all above $250,000.

If your earned income is $100,000 and you have $200,000 of dividend income, I would expect only $50,000 of the dividend income to be taxed at 20%, since the first $150,000 of dividend income is still below $250,000 of total taxable income. That's just my guess about a law that doesn't exist.
exigent
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Post by exigent »

When does the 3.4% healthcare-related tax kick in?

Edit to add: Found it. It's 3.8% and will go into effect in 2013. Great summary from Tax Foundation here.
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tfb
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Post by tfb »

Discussion about pending legislation is not allowed under forum rules. I expect this thread to be locked soon.

[TFB is correct. This thread is locked.]
Harry Sit has left the forums.
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