Tax uncertainty is making life more complicated for the dividend investor. Learn more.
Market volatility and record low interest rates have increased the appeal of dividend stocks in recent years, but tax-uncertainty following the presidential election creates new challenges for the dividend investor. What’s the outlook for taxes in 2013? What are the implications for the dividend investor?
Through 2012 the tax rate on dividend income remains capped at 15 percent, but many analysts and investors expect this rate to increase in 2013 when the current tax law expires. Should Congress fail to extend Bush-era tax cuts or take other legislative action, dividends would be taxed as ordinary income in 2013. Additionally, income tax rates would rise for all taxpayers.
“The election did nothing to clarify how Congress will resolve the looming fiscal cliff,” said Michael Townsend, vice president for legislative and regulatory affairs at Charles Schwab & Co. Inc. “The Republican-controlled House has called for a one-year extension of all the tax cuts, while the President and Senate Democrats have insisted that the Bush tax cuts must expire for the wealthiest filers. Neither side appears willing to budge on those basic positions.” (Townsend made his comments in a recent Expert Insight and Commentary on the Schwab website.)
What are the implications for the dividend investor? Dividend-paying stocks play an important role in the wealth building strategies of affluent investors, according to ongoing Millionaire Corner research. Millionaires commonly rely on dividends as a source of income in retirement - a strategy that has gained popularity as yields from traditional retirement products remain at record lows.
Millionaires also perceive investing in companies that pay dividends as a strategy to cope with market volatility. As a general rule, companies that pay dividends are larger and more stable than growth companies, and the dividends that they pay out help to offset the uncertainty created by wild market swings. At the same time, it’s important to remember that dividend stocks expose investors to several types of risk. Dividend companies can and do lose value, and dividend payouts can be cut or reduced at any time.
What’s a dividend investor to do? Townsend, of Schwab, expects tax uncertainty to continue through the Thanksgiving holiday. He said, “Congress’ post-election or ‘lame duck’ sessions are notoriously unpredictable. Emotions will remain raw for several days after an election this closely fought. We expect and unpredictable few weeks replete with rumors and misinformation, but we don’t foresee much clarity until well into December.”