Many Taxpayers Will Be Affected if Dividend Tax Rates Rise: Results for the States

As the debate about how to resolve pressing budget and tax issues continues, policymakers must confront a host of decisions. One of the key issues to decide is the fate of the tax rates on income, dividends and capital gains which were enacted during the 2001-2005 period. The ACCF presents this Special Report to help policymakers, the public and the media understand the short and long run consequences of raising tax rates on dividends.

Background:

A series of temporary tax relief measures were enacted by President Bush, including income tax rate cuts in 2001 as well as decreased tax rates for individual capital gains and dividends in 2003. These reductions brought parity between dividend and capital gains tax rates at 15%. Unless Congress acts, and if the nation goes over Fiscal Cliff, the top rate on dividends (now 15%) will expire at the end of 2012, and revert to 43.4% (39.6% plus the healthcare surcharge of 3.8%) raising taxes by almost 190% for millions of Americans. Capital gains tax rate will rise to 23.8% (20% plus the healthcare surcharge).

There are different plans being discussed in Washington, DC as part of the effort to avert the pending tax increases. Possible outcomes are:

1. Revert to pre-Bush levels, as discussed in paragraph above.

2. Keep parity between capital gains and dividends at an increased 20% rate.

3. Keep the Bush tax cuts for capital gains and dividends, parity at 15% rate.

Regardless of the plan chosen, the top dividend and capital gains tax rates will be increased by the 3.8% healthcare surcharge.

A new special report by the American Council for Capital Formation (ACCF) details a state-by-state breakdown of the nearly 25 million individual taxpayers who had qualifying dividends in 2010, totaling $135.3 billion.   In many cases, taxpayers are faced with both federal and state taxes on qualifying dividends. The ACCF Special Report also breaks down the number of returns with qualifying dividends by adjusted gross income and finds that some states are seeing as high as 27% of those returns are filed by taxpayers making less than $25,000 annually.

Download Special Report