Friday, December 9, 2011

Triple Taxation of Company Dividends

Many astute investors and folks who have retirement plans, or extra money to invest probably already know about the "double taxation" of dividend payments. Go ahead and "Google" the phrase "double taxation of dividends" and you'll have a decent understanding of this info. I'll break it down as briefly as possible here.

The US sports a corporate tax rate that is the highest (or nearly the highest) of any "developed" country in the world. The news headlines always berate companies for moving jobs over seas, but they fail to realize that money flows to places where it is best treated on a tax basis - much like consumers put their money in savings accounts that yield the highest interest rates....

The "double-taxation" of dividends is based on these facts. If you own a stock within a mutual fund for your retirement plan (which most of you do), or own it directly - you own the right to receive any dividend payments from the company (and may experience appreciation in stock price in favorable conditions).

Here is where the math comes in and where one may fall asleep. If you hold shares of companies in a mutual fund/retirement plan, YOU have a share in the excess profits of the company that can be paid as dividends. You in effect - own the company. The company pays a record-high corporate tax rate of approx 35% on profits - so you just took a 35% tax hit off the top. Then they reward loyal shareholders like yourself with a dividend. That dividend you receive is taxed at 15% (currently - but will likely go much higher). So, your share of profits from the company are taxed at an "effective rate of 45-50% or more).

Here is where my "triple taxation" statement takes hold - and no one else has talked about. Let's say you have some extra money to invest after you have already paid the income taxes on the cash. In this situation, you can buy a stock that pays a nice dividend, but you already paid income taxes on your paycheck of say 25% - then the evil corporation gets taxed at a 35% rate (which cuts into your possible dividend pay-out), and then you get taxed again on the dividends at a "low" rate of 15%.

And people wonder why the rich take tax loop holes (and move their businesses over-seas), and why the poor keep getting screwed. It all lies in our oppressive tax code....

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