Rising dividend taxes

The United States will have one of the highest tax rates on dividend income in the industrialized world if Congress does not stop the expiration of the Bush tax cuts on investment income by the end of the year.

Dividends will be taxed as ordinary income in 2011 after the 2003 Bush tax cuts on this form of investment income expire at the end of 2010. That would jump the top tax rate on dividends from 15 percent to 39.6 percent.

ADVERTISEMENT
Wealthier taxpayers will also be hit by a new tax on dividends created by the healthcare law. It extends the Medicare tax, now imposed on wages and self-employment income, to dividends, as well as interest, capital gains, annuities, royalties and rents.

Only individual taxpayers with adjusted gross incomes above $200,000 and joint filers over $250,000 are subject to this new tax.

Robert Carroll, a fellow at the Tax Foundation, said he’d give the Obama administration “reasonable grades” on investment tax policy for proposing that the tax on dividends only rise to 20 percent.

Democrats in Congress would get much lower grades, he said, since they appear disinclined to prevent a large tax increase on dividends.

The issue appears to have won little traction so far in the House.

The New Democrat Coalition, a pro-business caucus of House Democrats, still hasn’t come to an official position on the issue, though some members have expressed concerns about the tax.