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lemoneater (57.14)

Marginal vs. effective tax rate what does it mean?



December 17, 2012 – Comments (5) | RELATED TICKERS: GLW

Is it time to break out the mason jars and bury my money rather than invest because the tax on dividends will be too high? Somehow the lack of panic here seems almost surreal given the hype elsewhere.

From what I can gather, the media excitement is mostly about marginal tax rate--the highest possible rate, but effective tax rate is more relevant for most people. 

To keep things simple: consider a couple who has a  combined lower middle class income less than $70K and makes a total of $1000 in dividends in a taxable account. What is the tax rate going to be this year vs. last year?

Thanks in advance for your help. I need to know whether I should buy some glass jars or some more shares in Corning.


5 Comments – Post Your Own

#1) On December 17, 2012 at 6:51 PM, rd80 (95.67) wrote:

What is the tax rate going to be this year vs. last year?

I don't think anyone knows yet.  If the politicians can't reach a deal, dividends would go back to being taxed as regular income. 

If our illustrious leaders do reach a deal, the dividend tax would be dependent on what was horse traded for what.  That said, I'd be surprised if a couple with $70k income would see an increase in dividend taxes.

There's also an investment surtax on divs as part of Obamacare, but I don't think that kicks in unless total income is over $250k for couples.

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#2) On December 17, 2012 at 8:23 PM, ChrisGraley (28.63) wrote:

Assuming no deal is made. 

Your divedend tax will roughly double. You'll go from roughly 17.5% to roughly about 36%.  This is not including the Obamacare tax.

I see it as the opposite that rd80 does. I expect the 70k couple to have a higher burden than the 250k couple. There are more tax dollars to be taken from the 70k couple than the 250k couple. 

I also don't see an agreement by 1/1/2013. I think both sides are hoping to increase their leverage by making the rest of us panic.


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#3) On December 18, 2012 at 8:53 AM, lemoneater (57.14) wrote:

Thanks for the info Russ, that clarifies things. Nothing is settled as yet. I should have known. I hope we fit into the lower tax category. But often "taxing the rich" means more taxes for almost everyone in application.

However, lethargy is the touchstone of our economic process so I will bide my time and remain calm.

Chris, even if the dividend tax rate doubles, or even triples--perish the thought!--I still will be better off dividend investing some gain is better than none. There also is share price appreciation to consider and the interest rate on my savings account is pathetic. Yes, it does seem that both parties--party at our expense :(.

Lethargy is the touchstone of our economic process I will take what comfort I can from sluggish legislative efforts.

I choose not to panic. I am tired of going on red alert at the whim of others. Having wise friends also lessens the desire to panic. Thank you!

Also I'd rather spend my time doing something productive like weaving or writing something for enjoyment.

Happy Holidays! Count your blessings :).

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#4) On December 18, 2012 at 5:31 PM, Melaschasm (70.45) wrote:

On average, americans with an income in the 70k range should have their dividend stocks in tax advantaged retirement accounts.  That doesn't help retired people living on those dividends much.


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#5) On December 19, 2012 at 8:45 AM, lemoneater (57.14) wrote:

Yes, I thought about having our stocks in tax advantaged retirement account, but we wanted more liquidity. I'm treating my brokerage account more like a high yield/risk savings account. Gone are the days when a simple savings account effortlessly yielded 5% interest.

With our employer we do have some stodgy mutual funds in an IRA. I mostly forget about it, because the investment choices are very restricted for someone like me who enjoys researching and picking individual stocks.

Melaschasm, I do wonder about what effect dividend rate increases will have on those with a fixed income. Thanks for your input.

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