Most of the attention around the tax hikes that are scheduled to hit on January 1st has been focused on income taxes.The Bush tax cuts are set to expire, and unless we get a deal on the Fiscal Cliff, this will mean that the top-bracket income tax rate will rise from 35% to 39.6%.
That’s a meaningful increase, but it’s hardly debilitating, and the resulting tax rate will still be historically low.
Capital gains taxes will also revert to Clinton-era levels, rising from 15% to 20%, with a 3.8% Obamacare surcharge to be tacked on top. That’s also a meaningful increase, but not a life- or behaviour-changing one. And the 23.8% rate will also still be historically low.
Much less noted–and much more meaningful for many high-earning Americans–is the scheduled increase in dividend taxes.
Thanks to Obamacare, dividend taxes will already have the extra 3.8% surcharge tacked on top of them regardless of what happens with the Fiscal Cliff deal.
More importantly, dividend taxes for the highest earning Americans are set to rise from the Bush-era 15% all the way back to the Clinton-era 39.6%. In other words, they’re set to be taxed as ordinary income again.
Adding in the Obamacare surcharge, therefore, if current law is enacted, this will result in an astounding tax hike on qualified dividends from 15% to 43.4%.
What this means is that well-off Americans who are collecting, say, $100,000 a year in gross dividend income will keep about $57,000 next year versus $85,000 this year, a drop of 33%.
Unlike the change in income taxes and capital-gains taxes, that change is big enough to create a strong incentive for changes in behaviour.
But now there’s good news for folks who get a lot of income in dividends!
Obama appears to be caving on the idea of raising dividend taxes all the way back to Clinton-era rates.
The current plan, according to a report from Huffpo’s Ryan Grim, is to tax dividends and capital gains at the same rate–20%. And this rate will only kick in at a relatively high income level: The White House wants $250,000 and the Republicans are pushing for $1 million.
The difference between a top tax rate of 23.8% and 43.4% is enormous.
And it disproportionately helps the richest Americans:
- 47% of all dividend income is earned by the 3.8% of American households that make more than $200,00 per year (2009 tax data)
- Households that make more than $200,000 collect a total of $70 billion of qualified dividends per year (2009). This tax change will save these households about $14 billion a year.
- The top 400 highest earning taxpayers collect about $10 billion a year in dividends, or $25 million apiece. This tax change will save these folks a BOATLOAD of money: About $2 billion in total, or an average of about $5 million apiece (2009 data)
In other words, if this change is agreed to, it will save a vast amount of money for some of the highest-earning Americans.
So, be happy this morning, rich Americans!
Mr. Boehner’s cutting a great deal for you!