If you've been reading the financial press and following Washington's debate over health care reform, you may have run across some scary articles that got your heart pounding and your palms sweating. Well, calm down and take a deep breath. It might not be as bad as you think.
One proposal coming from the House of Representatives would boost the taxes many Americans pay on their income, via a surtax of as much as 5.4 percentage points. That sounds terrible, right? After all, most of us think we pay plenty already.
But bear in mind that the full extent of the surtax may not apply to you. Under the current proposal, only couples with adjusted gross income of more than $1 million would pay the full 5.4-percentage-point surtax. I don't know about you, but that leaves me out. Those earning between $350,000 and $1 million would pay between 1 and 1.5 percentage points more. Those earning less than $350,000 would see no surtax.
The dividend truth
Other articles point out that the tax on most dividends, which was lowered to 15% for most of us a few years ago, could be taxed at rates greater than 40%, if prior tax cuts are allowed to sunset and the surtax is passed. Also, capital gains rates could rise as well. That would indeed be jarring, if true. Look at what it would mean for $70,000 divided between the following dividend-payers:
|
Company |
Recent Yield |
Annual Dividend Payment on $10,000 Investment |
Amount of Tax at 15% |
Amount of Tax at 40% |
|---|---|---|---|---|
|
Total |
4.7% |
$470 |
$71 |
$188 |
|
NYSE Euronext |
4.5% |
$450 |
$68 |
$180 |
|
Nokia |
3.8% |
$380 |
$57 |
$152 |
|
ConocoPhillips |
4.2% |
$420 |
$63 |
$168 |
|
France Telecom |
7.8% |
$780 |
$117 |
$312 |
|
Eli Lilly |
5.6% |
$560 |
$84 |
$224 |
|
Coca-Cola |
3.3% |
$330 |
$50 |
$132 |
|
Total |
$3,390 |
$510 |
$1,356 |
Data: Yahoo! Finance.
Wow -- a difference of almost $850!
It's true that those rates could apply to top-bracket taxpayers. But even if Congress does nothing to extend preferential treatment for dividends, most taxpayers are in lower brackets. If you're in the 28% bracket, for instance, the most your dividends would get taxed is 28%. Only those with very steep incomes who would ever pay anything close to 40%.
More importantly, the administration has proposed capping dividend and capital gains taxes at 20%, even for high-income taxpayers. That's a tax increase, but not as big an increase as some fear.
Before you get overly concerned by seemingly scary financial news, make sure you have all the facts. Digging for more details can save you from needless worry.
Learn more about savvy investing in these articles:
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