Benjamin Franklin once observed, "In this world nothing can be said to be certain, except death and taxes." He was right -- until now. While the prospects of death remain constant, federal tax rates have no certainty.
Qualifying dividends and capital gains are currently taxed at a maximum of 15%. To make these rates permanent, the United States Congress would have to pass the below bill (H.R. 809), which now sits dormant in the House Committee on Ways and Means:
To make permanent the individual income tax rates for capital gains and dividends.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. INDIVIDUAL INCOME TAX RATES FOR CAPITAL GAINS AND DIVIDENDS MADE PERMANENT.
Section 303 of the Jobs and Growth Tax Relief Reconciliation Act of 2003 is amended--
(1) by striking 'this title' and inserting 'section 302', and
(2) in the heading, by striking 'title' and inserting 'section 302'.
Yep. Two simple steps and this 15% dividend and capital gains tax courtship is signed into marriage.
Didn't know it was in jeopardy in the first place? It is. And if this bill doesn't become law, then the 15% dividend and capital gains tax rate that went into effect when President Bush signed the Jobs and Growth Tax Relief Reconciliation Act of 2003 into law could expire by 2009.
This means that if you plan on holding an investment for at least four years (and in most cases you should), there's a chance that your returns in the future will be lower than you'd hoped.
If you read our newsletters, you've seen Tom Gardner's Hidden Gems walloping the market with picks like CantelIndustries
In other words, would you rather own Mathew Emmert's recommendation, Great Plains Energy
Under current law, Great Plains is the hands-down winner, at least in Mathew's eyes. In addition to any gains you may realize on an appreciation in the price of the stock, you'll pocket a nice 4.8% yield after the soft 15% tax hit. But if dividend tax rates revert to the old ordinary income rate, then, assuming the familiar 35% haircut, Great Plains' 5.56% yield becomes a more mediocre 3.61%. Unlike the muni, the stock can appreciate in value, but since the muni carries far less risk than the stock, this is now a closer call. Depending on your timetable and stomach for market fluctuations, it could go either way.
Congressman Eric Cantor (R-VA) introduced the above bill into the House of Representatives. He's the Deputy Whip on the Republican side and as such, holds a little bit of sway. The House has already passed H.R. 8 to make the repeal of the estate tax permanent, and that bill now sits on the Senate's calendar, which means these issues are on their radar. If our dear Members finally decide about the dividend and capital gains tax rates, we'll be able to predict rates of return with better certainty. If not, then death's the only thing I know for certain. And that's not a very pleasant thought.
For more about dividends and the 15% dividend tax rate, try these Foolish pieces:
Tim Hanson tries not to think too much about death or taxes. He has no financial interest in any of the companies mentioned in this article.