In my ongoing series of what is on Congress's plate to "fix" before the end of this year, not many folks understand the looming tax hike on dividends set to happen in 2011.
Current tax law on dividend income is a flat 15 percent. It is set to end in 2010. Two times before, Congress has voted to extend this flat 15 percent rate. If they let it expire as scheduled, the possible top tax rate on dividend income could go up to 39.6 percent. That's a 164 percent jump!
Anybody want to guess which industries would be hit hard if Congress doesn't act? Energy. Especially new projects like solar, wind, geothermal, etc. If investors don't have the incentive to purchase energy stocks, that traditionally pay very high dividends, the source of capital being used to build these new energy plants, is projected to dry up.
Where would these energy companies have to go if they couldn't sell enough stock? Banks. Do I need to go into the problems everybody is having getting a loan from a bank these days?
In one of my previous columns, I pointed out the benefit of domestic corporation dividend income being excluded from income (up to a point, then its taxable). This tax hike would not affect those taxpayers that previously got that Qualified Dividend exclusion. Only those who are "too rich" would be affected.
Some folks might say, "So what Kelly! The rich can afford to pay more taxes." One must understand that those "rich folks" are going to naturally migrate to the least taxable means to "park" their money. The current administration has telegraphed their intentions to penalize anybody who makes over $250,000 a year. So, now those "rich" are discouraged from starting up new businesses - creating a situation that causes unemployment to remain at all-time highs. Those "rich" are currently being told NOT to plan on long-term investments in corporations that pay high dividends - creating a situation that causes renewable energy projects to cost more and take longer to complete.
One must wonder, what would happen if we stopped penalizing the "rich" and started encouraging them to put their money into play to help rebuild our economy instead of wasting their time trying to figure out ways to hide it from the government?
Current forecast of Congressional expectations are grim. Harry Reid is hyper-focused on trying to save his Senate seat. He has not signaled any interest at this time in tackling things like Dividend Tax Rates or Alternative Minimum Tax Exclusions, Estate Taxes, etc.
Do you think that anybody is placing odds on what tax "fixes" Congress will actually pass before the end of 2010? At least for now, all bets are off.
• Kelly Bullis is a Certified Public Accountant with over 30 years of experience. Contact him at 882-4459.