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Q: This is Part 2 of last week’s question about a proposed increase in tax rates for qualified dividends (as well as capital gains).
A: Capital Gains and Qualified Dividends are taxed at the same rates, based on overall taxable income. The category of a qualified dividend was created in 2003 and has been part of the tax system since that time. It was intended to incentivize the payment of dividends by public companies. If companies paid dividends that fit the criteria to be qualified, theoretically their stock would be more attractive to shareholders.
Taxing all dividends as ordinary income could lead to lower dividend yields on US stocks, which runs counter to some policymakers’ stated desire to have more company profits paid to shareholders rather than being used for something like stock buybacks.
As we shared last week, we think lower tax rates for capital gains (and qualified dividends) provide positive incentives to investors that shouldn’t be underestimated.
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