Before the Bush tax cuts of 2001, dividends were taxed at the same rate as income, which could be as high as 39.6%. Today, individuals pay a maximum of 15% tax on dividends. This is unknown to some people, and this is what is referred to as the dividend tax break. There are rumblings that the rate could rise to 20% in 2013, but even at 20% for most families or individuals, it would still be less than their top marginal tax rate. This alone has kept stocks that pay healthy dividends to keep a more stable value, or a lower beta.
This is also important to consider for profits. Lets demonstrate another example:
Stock 1 pays no dividend. You invested $2,000 and sold the stock for $2,800, or an $800 profit. If your marginal tax bracket is 25%, your tax burden would be $200, and you would have a $600 profit.
Stock 2 paid $300 in dividends. You invested $2,000 and sold the stock for $2,500, or a $500 profit. Paying 25% on the $500 profit, would cost $125 in taxes. The $300 in dividend income would cost $45 in taxes, or a total tax burden of $170. This is a savings of $30. This doesn’t seem like much, but this is based of a small investment, and any money left in your pocket or in your stock account means the possibility for more future profits. Take advantage of the dividend tax break while it is still available.
Below is a table showing dividend taxation from 2003-2013. This could possibly be the final year of the dividend tax cuts, but it appears they will be extended for the foreseeable future.
|Ordinary Income Tax Rate||Ordinary DividendTax Rate||Qualified DividendTax Rate||Ordinary DividendTax Rate||Qualified DividendTax Rate||Ordinary Income Tax Rate||Ordinary DividendTax Rate||Qualified DividendTax Rate|
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