Seniors, Retirees Could Feel Pinch of Dividend Tax Hike


A dividend tax rate hike scheduled for January might have an impact on Americans who rely directly and indirectly on dividends, a study found. 


Americans at all income levels may see an increase—and older investors who are at or nearing retirement age might hurt the most, according to a study prepared for Edison Electric Institute (EEI) by the accounting firm Ernst & Young. The increases stem from tax cuts set by President George Bush that are set to expire December 31.

The study was released just ahead of a House vote, slated for July 30, on whether to extend the current federal income tax rates, which includes the tax rate on dividends.

 “Dividend income benefits millions of Americans who are not wealthy, including many seniors and those investing for the future of their families,” said Lew Hay, chairman of EEI and executive chairman of NextEra Energy in Juno Beach, Florida. “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.”

The current 15% tax rate on dividends will expire at the end of the year, unless Congress and the president intervene. If no action is taken, dividend tax rates for all income levels will increase, with the maximum tax rate skyrocketing to 43.4% —a 189% increase, EEI’s study contended.


“This is a non event for most elderly people, who mostly earn less than $250,000, so they’re not affected,” said Chuck Marr, the director of federal tax policy for the Center on Budget and Policy Priorities. “Utilities are the ones most concerned about dividends because their equity is similar to that of corporate bonds.




But since no rate schedule exists yet, it is not possible to definitively predict the outcome, Abe Schneier, senior technical manager on the tax staff of the American Institute of CPAs (AICPA), told PLANADVISER. “The real issue is, how would [the expiration of the current tax law] affect the average person? Someone in the 20% to 25% tax bracket may see a much smaller ncrease on dividends,” Schneier said. “That 189% looks extremely high, but not everyone is going to go from paying 15% to 40%.”

The study analyzes IRS tax returns filed in 2009, the most recent year for which complete data are available, in order to provide a profile of dividend recipients. Of the 25.4 million tax returns with qualified dividends, 63% were filed by those age 50 and older.

"This study illustrates the concentration of seniors and middle-income taxpayers relying on dividends," said Jim McCrery, manager of the Alliance for Savings and Investment, a coalition of companies, trade associations and investor organizations.  "If the top tax rate is nearly tripled–even if limited to upper-income taxpayers—it is likely that companies would reduce their dividend payouts, which would hurt direct and indirect investors at every income level."

According to Schneier, the 189% figure doesn’t tell the entire story of how it’s going to affect all taxpayers in the broad sense.

The EEI is the association of U.S. shareholder-owned electric companies.

View the report here.