The 2011 Dividend-Tax Mystery

Next Jan. 1, a package of tax changes enacted under President George W. Bush expires. These provisions contained a historic change for dividends: For the first time, most were taxed at the same low rate as capital gains. Until then dividends had been grouped with interest, with both taxed at the higher rates levied on wages. In 2003 the nominal top rate on qualified dividends (usually, on stocks held longer than two months) dropped to 15%, where it has been ever since.

Next year, what will the top [U.S.] tax rate on dividends be? The short answer is that the 2011 nominal rate on dividends could be either 20% or 39.6%. Or something else—it is impossible to say given the legislative mood these days. If Congress doesn't act, next year the top dividend rate would automatically revert to 39.6%. But this lapse isn't likely to happen, for a reason many have overlooked. Lawmakers can't simply allow the Bush changes to expire in the way they did with the estate tax, because the lapse would affect even more low earners than high earners.


Source: Wall Street Journal


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