That's right-taxes are going up by 3.8 percentage points on all
joint filers with adjusted gross income of more than $250,000 and
on single filers with incomes over $200,000. These changes
are going up next year-a full year before the health law is
scheduled to take effect.
The additional tax will likely apply to dividends, interest
(excluding municipal bond interest) and short- and long-term
capital gains, according to the Wall Street Journal.
This additional tax could potentially have a significant impact
on all the dividend-focused ETFs that have been so popular
A 3.8 percentage point tax hike may not seem like a big deal
until you consider it in the context of tax rates as they currently
stand-and what they could rise to if the Bush-era tax cuts aren't
Currently, dividends are taxed at 15 percent, and will be taxed
at 18.8 percent starting next year if the Bush tax cuts
If the tax cuts
extended, however, the dividend tax rate could rise to as much as
43.4 percent. In comparison, long-term capital gains rates would
rise to just 23.8 percent, making companies and funds that don't
pay out investment income much more attractive.
High-income-producing ETFs may also lose assets, as
high-tax-bracket investors flee to municipal bonds or
lower-yielding funds, which could potentially dry up liquidity and
increase trading costs.
At the most extreme, high-dividend-paying companies may lower
their dividend payouts, as executives at the top who are paid
mostly in stock seek to avoid the added dividend tax.
Now is a good time to take a close look at your portfolio and
determine what your tax liabilities could become next year and
whether your portfolio will still make financial sense under the
two possible tax scenarios.
Over the past year, the iShares Dow Jones Select Dividend ETF
(NYSEArca:DVY) paid out $1.85 per share in dividends.
So, if you held a $100,000 position in DVY, you received about
$3,290 in dividends. If DVY were to pay out comparable dividends in
2013, you would be on the hook to Uncle Sam for about $1,500 if the
extended, or $620 if they
And, as long as I'm parsing tax liabilities, under current
rules, you'd owe about $500.
Keep an eye on Congress as it debates whether to extend the tax
cuts. If you're in the top tax bracket and own high-income-paying
ETFs, your tax bill next year could go up significantly.
Permalink | 'copy; Copyright 2009 IndexUniverse LLC. All rights
Don't forget to check IndexUniverse.com's ETF Data
2012 IndexUniverse LLC
. All Rights Reserved.