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That would make sense if dividends were not double taxed. Dividends are paid from after tax dollars and then the investor has to pay taxes on dividends again.
by dman 8y ago
That would make sense if dividends were not double taxed. Dividends are paid from after tax dollars and then the investor has to pay taxes on dividends again.
- tomerico 8y agoI wish the law allowed investors to reinvest the dividends and postpone the tax event. This would have improved the current skewed state.
- mlevental 8y agoit does? you don't pay capital gains on reinvested dividends
- gascan 8y agoPretty sure DRIP is still taxed.
- sk5t 8y agoIt surely is, just the same as a dividend not-reinvested.
- spacehome 8y agoIt's not capital gains, because nothing is sold, but dividend income is taxed, whether or not it's re-invested. Form 1040, line 9.
- Godel_unicode 8y agoDividend income on "qualified dividends" is taxed at the capital gains rate.
- loeg 8y agoEmphasis on "is taxed."
- Godel_unicode 8y agoCapital gains is just the name for the tax rate for investment income. Qualified dividends are short term capital gains, ordinary dividends are long term capital gains. https://www.irs.gov/instructions/i1099div#idm140075526633184 https://www.irs.gov/instructions/i1099div#idm140075526633184
- loeg 8y agoNo, to be precise a "capital gain" is a specific type of income that a dividend is not. Short term capital gain income is taxed as ordinary income. Long term capital gain income is taxed at a favorable rate called the "long-term capital gain (tax) rate." You have the rates for qualified and ordinary dividends backwards. Qualified dividends the ones that get taxed at the same lower rate as capital gains income (i.e., they "qualify" for preferential tax treatment).
- spacehome 8y agoSure, but just because two things are taxed at the same rate doesn't make them the same. And I would argue that, in effect, the capital gains are taxed less because the tax is not taken out each year, and instead the capital is left to compound.
- Godel_unicode 8y ago"...paid dividends (including capital gain dividends and exempt-interest dividends". https://www.irs.gov/instructions/i1099div#idm140075526633184 https://www.irs.gov/instructions/i1099div#idm140075526633184
- loeg 8y agoI think that parenthetical section is calling out capital gains distributions (something common for mutual funds) and exempt-interest dividends in particular because they are not ordinary dividends. "Capital gain dividend" does not mean the same thing as "qualified dividend."
- Godel_unicode 8y agoYou are technically correct assuming your dividends aren't of the qualified variety. In that instance you don't pay capital gains, you instead pay full-fat income taxes! Capital gains are, however, absolutely owed on qualified dividends. In either case (with the added assumption that we're talking about securities held in a non-tax-advantaged account), your brokerage will send you an IRS form 1099-div. https://www.investopedia.com/ask/answers/011215/if-i-reinvest-my-dividends-are-they-still-taxable.asp https://www.investopedia.com/ask/answers/011215/if-i-reinves...
- Godel_unicode 8y agoI think this is unlikely to happen in the current climate; it would be seen as a tax break for the rich. It's frustrating to me how many otherwise good ideas are off the table as they would be seen as helping the rich get richer. Look, for instance, at the proposal to reduce the deductible limits for retirement contributions.
- nemo44x 8y agoMany are qualified dividends so they are taxed as long term capital gains if you’ve held the stock for at least 60 days. If you are wealthy and don’t draw an ordinaryincome then this also means your tax rate is 0% on your qualified dividends.
- gnicholas 8y ago> * If you are wealthy and don’t draw an ordinary income then this also means your tax rate is 0% on your qualified dividends.* Really? I thought qualified dividends were taxed at the same rate as long term capital gains. This is zero for very low-income taxpayers, but certainly not "wealthy" ones, like you describe. Or perhaps I'm missing something?
- toast0 8y agoThere's a difference between high income and wealthy. If you're wealthy, and you retire, you may not have a current ordinary income, so that any LCTG is all within the 0% rate; if your total taxable income is less than $38,600 for single filers, or $77,200 for joint filers; in connection with the standard deduction of $12k or $24k. If you make assume no other income, that's just about $50k or $100k of untaxed LTCG, in addition to whatever returned capital you need to spend. The trick is somehow the popular media has changed the word wealthy to mean high income instead of, you know, having wealth.
- gnicholas 8y agoI'm aware of the distinction between wealthy and high-income (was a tax lawyer in a former life). I was objecting to the if-then in the prior post that said: if you're wealthy and don't have OI, then your dividend rate is 0. This is not true. It is only true for the first chunk of income, as you note. Also, this is equally true for LTCG, so in the context of this discussion (qualified dividends versus buybacks, which increase LTCG), it doesn't move the needle one way or the other.
- sokoloff 8y agoOnly on the first ~$77K worth, which is probably less than the annual dividend plus capital gains income for a wealthy person.
- torstenvl 8y agoThat's not double taxation. The corporation is a different legal person. When you receive income from a corporation, that transaction is taxed, just like when employees receive their income from their (usually incorporated) employers.
- cynicalkane 8y agoYes it is. A stock buyback increases shareholders' wealth with a tax of 0% on the shareholders. The tax code makes a bright line out of the distinction between income and capital that is, economically speaking, quite fuzzy. Depending on your need for liquidity and your means of acquiring it, it might not be really there.
- torstenvl 8y agoWhen the shareholder realizes the gain from the share price, that gain is taxed. And if it is a short-term holding, that income is taxed like regular income. Nobody is getting taxed at 0%.
- mercutio2 8y agoIf you have little or no ordinary income, a decent chunk of qualified dividends and long term capital gains pay 0% federal income tax. $77k for joint filers in 2018. [0] Not a particular trustworthy site, but whatever: [0] https://www.thebalance.com/how-to-use-the-zero-percent-tax-rate-on-capital-gains-2388995 https://www.thebalance.com/how-to-use-the-zero-percent-tax-r...
- fiter 8y agoIn order to realize this tax free wealth gain, the shareholders would have to sell the stocks and pay taxes, right? It sounds like then the most important factor is not the double taxation, but that you get to choose when the "second" taxation occurs.
- hackerdr 8y agoThe investor pays tax when the stock is sold. That tax implication is exactly the reason that many investors prefer buybacks over dividends.