Dividend and Capital Gains Tax increase

[NW-Bound]

In the ideal world, income tax brackets, dividends, and stock gains should all be adjusted for inflation. Tough luck if that is going to happen. No way!

Look at the AMT. Everybody knew about this problem with it not being inflation-indexed, but did Congress ever do anything about it? As I have worked part-time the last few years, plus my wife retired 5 years ago, our income has not been up there for me to know if there has been any change.

And think of the folks who are leery of stocks and buy CDs. They lost money because the interest is below the inflation rate. The tax on that interest adds insult to injury!

 

[meierlde]

Hi all

Read that the new tax overhaul proposal taxes dividends at 43% and capital gains at 23.8% (from the current 15% for both). Since many retirees depend on these types of investment vehicles for income, seems to me this is potentially a huge consideration for ER. The rates quoted are for the "top" tax rates implying that rates are tiered. Nonetheless, still a significant hit.

Opinions on how realistic this is (will it happen?)?
Strategies on dealing with it if it does?

Note that these rates in 2013 would start at a gross income of about 390k a year. The 36% bracket would extend down to 250 or 200k depending on if married or single, below 217k it would be 31% and below 142 it would be 28%. Note that the last 2 assume the bush tax cuts are not extended beyond 2012. The Obama proposal would not touch folks below 250/200 k neither on dividends/capital gains or overall rates. Note that the 39.6% rates is a rate that only 1% of taxpayers pay so it is truly a 1% rate.
Below 142k the rate would be 25 or if no law change 28% and below 70 k for married 15% so at that level it would not make any difference.

 

[meierlde]

Pension income is taxed at ordinary income rates. Dividend income is modest at best. So, very little impact to us, except when selling real estate (paper gains, more than offset by carrying costs).

One thing I can't understand: Since real estate capital gains are taxed, why can't real estate capital losses be used to offset capital gains?

Amethyst

They can except for personal residences. Of course on a primary residence you do get a 250/500k capital gain exemption. So today unless you have held a place for a very long time you should not have much taxable gain.

 

[Chuckanut]

On the face of it, this seems like a good idea. If I own one share of stock today that trades at $10.00 a share, I could sell it and buy 4 loaves of bread. If, due to inflation, in five years my share of stock is worth $20.00, but I can still only buy four loaves of bread with it, why should I be taxed on the $10 increase?

But then lets look at labor. Today, I have one hour of my time that I can sell for $10.00, with which I can buy 4 loaves of bread. If, again due to inflation, I am selling my hour for $20.00 in five years, but still can only buy four loaves of bread, why shouldn't I get the same inflation indexing for my tax bill?

A conundrum for which I do not have a good answer.

[-]I think the difference has to do with the fact that you can take the $10 you earned today and immediately buy those 4 loaves of bread. But, the $10 in capital gains one earns over 5 years can't be used to buy bread until the stock is sold. And at that time you can only buy 2 loaves of bread.[/-]

Never mind, the tax rates are indexed for inflation so in real dollars it's the same thing.

 

[pb4uski]

They can except for personal residences. Of course on a primary residence you do get a 250/500k capital gain exemption. So today unless you have held a place for a very long time you should not have much taxable gain.

+1

 

[ERhoosier]

In the ideal world, income tax brackets, dividends, and stock gains should all be adjusted for inflation. Tough luck if that is going to happen. No way!

Look at the AMT. Everybody knew about this problem with it not being inflation-indexed, but did Congress ever do anything about it? As I have worked part-time the last few years, plus my wife retired 5 years ago, our income has not been up there for me to know if there has been any change.

And think of the folks who are leery of stocks and buy CDs. They lost money because the interest is below the inflation rate. The tax on that interest adds insult to injury!

Agreed!
And AMT ain't the only thing about US Tax Code that's NOT indexed for inflation.

 

[NW-Bound]

“The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.” - Jean Baptiste Colbert (French Economist and Minister of Finance under King Louis XIV of France. 1619-1683)

 

[gerntz]

I don't see double taxation of profits - corp tax + dividend tax - as right. Seems there ought to be one total tax rate for corporate profits whether paid by the corp or as dividends. Say that's 35%. So if the corp's marginal rate is 25% in a year, the personal tax rate on that corp's dividends ought to be 10% & so on.