The final compromises in Washington kept the dividend tax rate at 15 percent for most small investors, and raised tax rates to 20 percent for those making taxable income in excess of $400,000 (single) or $450,000 (married). The 20 percent bracket will also have a Medicare 3.8 percent surcharge bringing the top rate total to 23.8 percent.
Given the gloom and doom and hand-wringing prior to year’s end, these numbers came as a relief to most corporate executives and investors. Fearing the worst, some companies had already taken measures to make dividend payments to investors ahead of the fiscal cliff deadline. This means that corporate America is well positioned now to consider raising dividend payments, and that the majority of small investors would enjoy any such payouts at last year’s tax rates while more affluent investors would see only a mild increase in tax rates. Starting out 2013 on such a note of optimism is great for the markets.
Investment analysts are upbeat about the prospects for continued dividend performance based on the payment trends of 2012, which saw Standard & Poor 500 companies pay out a record $281.5 billion in dividend payments – a 17 percent increase over 2011. Despite the fact this surge was fueled by fiscal cliff anxiety, as companies rushed to make payments before Dec. 31, experts still believe that 2013 will see a slight increase that reflects the overall financial health of many companies and their significant liquidity. Stock market experts were pleased to see dividend rates kept on par with capital gains taxes – regarding this move as a positive reminder to corporate America to return dividends to investors, thereby encouraging more individual investors to return to traditional types of investment. This should provide a welcome boost for stockholders who have hung tough.
Of course no tax code changes are ever simple, and this particular round is especially complex. For some investors – especially self-employed individuals and small business owners – these revisions signal a need to meet with tax and investment professionals to revisit investment portfolios. As a result of the American Tax Relief Act of 2012 and the Affordable Care Act, there are now several definitions of income with different tax implications. The previously noted numbers – $400,000 for single tax filers and $450,000 for married joint tax filers – include a lot of variables such as adjusted gross income, different categories of income, thresholds, etc. Throw in the factors involving the Affordable Care Act into the mix, and determining the best mix of investments in your portfolio can become a real headache.
The idea might be simple: make sure your investment portfolio is the right mix from a tax-efficiency standpoint. However, the process of assessing and determining what’s needed now is anything but simple, and it should be stressed that this job needs the guidance of professional tax and investment advisors.
Rebalancing aside, we do have reason for optimism for the markets in 2013. Despite the naysayers and global economic woes of 2012, the market is stronger than it has been for years. Let’s hope the tax dividend deal spurs the corporate sector to reward the individual investor and keep the momentum going.