Does Not Matter if You Are From a Blue or Red State

The following commentary expresses the political views of the author and in no way represents the views of LPL Financial.  The assumptions made are based on the proposed 2013 budget and tax provisions, which have yet to be approved by Congress and are subject to change.


In January, 2013, regardless of your political persuasion if you have dividend investment income, your taxes in all likelihood are going to go up if President Obama is re-elected in November.  It won’t matter whether or not you are for ObamaCare, or what religion you are, or if you’re skinny or fat, or whether or not you’re for fracking, or whether or not you think marriage should only be between a man and woman.  Your taxes could go up if you receive qualified dividend income if he receives a second term.

‘Wait a minute, not so fast,’ you say.  ‘I thought that taxes are only going to go up on those who need to pay their fair share…the 1 percenters making over $250,000 a year.  At least that’s what he’s been saying for the last two years and during this campaign.’ So what’s the truth?

The truth is that proposed income tax brackets for ordinary income taxation would remain the same for most Americans except for those with Adjusted Gross Incomes beginning at $241,900.  Beginning at those income levels, brackets would move to 36% from 33% and at $390,050 tax brackets would move from 35% to 39.6%.*  I know it might be hard for many of you to shed a tear for wage earnings at those levels receiving tax increases.  However, the increases are a bit more sinister than getting the rich to pay more of their “fair share.”

One of the benefits of the Bush Tax Cuts established in 2003 was that ANYONE receiving qualified dividends would receive those dividends paying a 15% tax.  Qualified dividends are defined as dividends paid by an American company or a qualifying foreign company.  Before 2003, dividends were treated as ordinary income, but the favorable treatment created by the Bush Tax Cuts helped all Americans with investments outside their 401k’s and IRA’s.  This change became a mainstay for retiree’s planning because it allowed them the ability to plan for tax favored income streams created by buying blue chip stocks that paid reasonable dividends.

So instead of buying bonds where the interest earned in most cases are taxed at ordinary rates, older individuals sought out stocks paying dividends for more favorable tax treatment.  These were not the Uber wealthy that the Obama Administration demonizes.  These are couples, widows and widowers over the age of 65 living on social security, small pensions, and small amounts of investment income. Portfolios have been bolstered with large public companies and other US multi-national companies with sound financials and dividend yields pushing 3% or more.

In our current environment of low interest rates, CD’s, and Treasuries which were once attractive to senior investors, now make little sense.  CD’s paying less than 1% doesn’t even keep up with inflation and 10 year Treasuries yielding 1.66 don’t either.  Higher yielding dividend stocks at these lower tax rates made sense and brought more money to markets.

If re-elected in 2013, all qualified dividends might be treated as ordinary income reverting back to pre-2003 rules.  So if you are single making more than $35,500, your tax may skyrocket from 15% to 28% above that level.  If you are a couple making more than $59,300, you might feel the same the same jump.

Since many of our clients we work with now receive a much higher percentage of their income from qualified dividends, they potentially stand to see their taxes increase and our clients are not unique. This could have an impact on older citizens with fixed incomes throughout the country.

If Obama is re-elected, years of strategic planning could be altered.  Retirees might be able to keep less of their dividend income while interest rates should be stagnant until at least 2014.  So CD’s and most bond choices don’t offer viable solutions in the near term.

There are many reasons why this might be the most important election in our Nation’s history.  No matter what side you are on, each side believes they have the most compelling arguments to elect either Romney or Obama.  Not since the Civil War have we been so divisive.  However, when it comes to tax changes for ordinary dividends impacting almost everyone in 2013, there is no argument.  The unintended consequence, however, is retirees who have suffered through low to no Social Security increases and miniscule interest income for nearly a decade could potentially suffer even more should the incumbent prevail.





* provided tax info.



HMC Partners and LPL Financial do not provide tax or legal advice.  The information contained in this report should be used for informational purposes only.  The appropriate professionals should be consulted on all legal and accounting regarding your personal planning.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance references is historical and is no guarantee of future results.  All indicies are unmanaged and may not be invested into directly.

CD’s are FDIC Insured and offer a fixed rate of return if held to maturity.

Bonds are subject to market and interest rate risk if sold prior to maturity.  Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.