AARP Eye Center
Relying On Dividends For Income? Tax Hikes May Be In Your Future
By Carole Fleck, July 16, 2012 10:34 AM
kenteegardin
If you're one of millions of older Americans who rely on dividends to supplement your income, brace yourself.
A sharp increase in dividend tax rates, scheduled to take effect Jan.1, will impact all investors but it will take a harsher toll on those at or nearing retirement, according to a new study for the Edison Electric Institute (EEI).
The analysis was released just weeks before the House is expected to vote on whether to extend the current federal income tax rates, including the tax rate on dividends.
"Dividend income benefits millions of Americans who are not wealthy, including many seniors," says Lew Hay, chairman of EEI. "Raising taxes on dividends would harm every American who owns dividend-paying stocks, as well as anyone who has an interest in a mutual fund, 401(k) plan, pension plan, or life insurance policy that invests in those stocks."
Federal tax rates on qualified corporate dividends were temporarily reduced from almost 40 percent to 15 percent when Congress passed the Jobs and Growth Tax Reconciliation Act in 2003. Those cuts were extended in 2006 and again in 2010. Taxpayers in the 10 percent and 15 percent tax brackets currently pay no taxes on qualified dividend income.
That law also cut the maximum tax rate on long-term capital gains from 20 percent to 15 percent.
The dividend tax rate reduction is scheduled to expire on Dec. 31 unless lawmakers move to extend it again. If the current rates do expire, dividend income will be taxed as ordinary income, with rates
rising to as high as 39.6 percent for upper-income taxpayers. The top tax rate on capital gains would climb from 15 percent to 20 percent.
According to the study, an analysis of some 25 million IRS tax returns found that 63 percent with qualified dividends were filed by those age 50 and older.
It's no wonder. With interest rates at historic lows, older Americans, particularly those living on a fixed income, have turned to dividend-paying investments to earn supplemental income.
"This study illustrates the concentration of seniors and middle-income taxpayers relying on dividends," says Jim McCrery, manager of the Alliance for Savings and Investment, a coalition of companies, trade associations and investor organizations.
Photo credit via flickr.com