The expiration of the Bush-era tax cuts on Dec. 31, 2012, would increase tax rates on most ranges of ordinary income including long-term capital gains along with qualified dividends.
But higher taxes won't just affect wealthy taxpayers like some people think.
A recent report by the Tax Policy Center notes: "Every income group would see taxes rise by more than 3.5% of pretax income. Upper income taxpayers would experience the largest tax increases, both in absolute terms and as a percentage of income. The top quintile would see its tax burden rise by slightly over $14,000 per tax return, almost 6% of pre-tax income. Taxpayers in the top 1% of the distribution would experience an average tax increase of over $120,000, slightly over 7% of their pretax income."
Dividends paid to stockholders will be hit hard. Instead of owing just 15% as they do today, investors who receive dividends will be taxed at according to their ordinary income tax rates.
Table 1 (below) shows the damage.
For example, individuals in the 25% bracket will get snagged for 31% versus 15% tax on dividends in 2013. Although certain tax brackets will completely disappear next year, what doesn't go away are higher tax rates across the board on all remaining brackets.
A Simple Case Study
What kind of impact will this have on dividend investors? Let's look at the numbers.
