It’s that time of year again. Time to buy the latest version of your favorite tax software, grab a cup of coffee, and start entering all your tax information. I have yet to start my own taxes for various reasons. Nevertheless, as I was reading my latest book, The Dividend Rich Investor, I made a couple of tax observations.
- My copy of The Dividend Rich Investor is from 1997.
- The tax burden on US dividend investors was vastly different in 1997.
You may think I am crazy for reading a book from 1997 about investing. However, I find it fascinating. It is like stepping back in time. I can see differences and similarities in the rational for dividend investing. For instance, the authors have the same point of view of dividend investing that many of today’s authors espouse. Increasing dividends are a sign of strength and the real power of dividends is in the future yield on cost.
The differences come about with the tax situation in 1997. In those days, people paid regular income tax on dividends. I started investing around 1997, but I did not transform into a dividend investor until 2002. It had slipped my mind that the current tax rates on dividends were implemented in 2003.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduces taxes on dividends to 15% for most individual taxpayers. Low income individuals are taxed at 5% on dividends, but starting in 2008 the dividend tax on low income individuals is reduced to zero. Bush pushed for the reduction on dividend taxes in order to get rid of double taxation on corporate profits.
When does this law expire? In 2011, unless it is extended or another law is passed. I plan to live on dividends later in life, so I hope the government keeps taxes on dividends to a minimum.
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