Washington INsider

Washington INsiderblog

Mark Schoeff Jr. looks at what's really happening on Capitol Hill - and the upshot for advisers.

Rift, rather the chasm, separates parties on investment-income taxes

'It all depends on your perspective'

Aug 3, 2012 @ 2:16 pm

By Mark Schoeff Jr.

Although a chasm separates Democrats and Republicans over most of the Bush tax cuts, the difference between them on taxation of investment income is more of a rift.

Earlier this week, the staff of Rep. Sander Levin, D-Mich., ranking member of the House Ways and Means Committee, issued a “fact-check” press release to rebut claims by House Speaker John Boehner, R-Ohio, who said that the bill passed by the Democratic Senate to extend the Bush breaks only for households earning less than $250,000 would hurt elderly Americans who depend on dividend income.

“The Senate-passed Democratic plan keeps the dividend rate at 15% on the first $250,000 of dividend income and holds the dividend rate at 20% on dividend income above $250,000,” the Ways and Means statement said. The Democratic plan would set capital gains at 20% for higher-income levels.

In seeking to extend all the Bush tax cuts for one year, Republicans want to keep both capital gains and dividends at a 15% rate for all income levels.

The two proposals are much closer than the distance between Republicans and Mr. Obama, who wants the dividend rate to snap back to the ordinary-income level.

That would mean that dividends would be taxed at about 44% for the highest earners. They would have to pay an income-tax rate of about 39% as well as the 3.8% tax on investment income imposed by health care reform.

The key movement over the last couple of weeks is that congressional Democrats “are prepared to keep the dividend tax rate the same as the capital gains tax rate,” said Andrew Friedman, principal at The Washington Update, which provides political and legislative analysis for investors and advisers.

Capitol Hill Democrats are taking a more practical view of investment taxation than Mr. Obama, according to Mr. Friedman. The president would like to see dividend taxes rise to stay in line with his effort to promote the so-called Buffet Rule, which would impose higher taxes on the wealthy.

“The Democrats in Congress are putting theory aside,” Mr. Friedman said. “They're saying, 'We don't want retirees in our districts who rely on dividend income to pay too high a tax on that.'”

Although a 5% difference on investment-income taxation may seem like a small amount, it could still become a major sticking point between Republicans and Democrats during fiscal-cliff talks in the lame-duck session of Congress later this year.

“In an era like this where everything is magnified, a tax increase of what may seem like a few points to one side is a big tax increase to the other side,” said Tim Steffen, senior vice president and director of financial planning at Robert W. Baird & Co. Inc. “It all depends on your perspective.”

The difference between Republicans and Democrats on the estate tax also is modest. The Republicans want to extend the current 35% rate and approximately $5 million exemption. House Ways & Means Democrats have introduced a bill that would set the top rate at 45% and the exemption at $3.5 million.

That separation, though, may turn out to be bigger in reality than it is on paper.

“Is the difference between $3.5 million and $5 million that big?” Mr. Steffen said. “It is if you're in that range.”

Democrats and Republicans are farther apart on the gift tax, with Democrats seeking a $1 million exemption and Republicans pushing for $5 million, according to Mr. Friedman.

He also warns that Congress may fall off the fiscal cliff, which would take the dividend rate beyond 40% and the estate tax rate to 55% with a $1 million exemption.

“You can't dismiss congressional deadlock and nothing getting passed,” Mr. Friedman said.

For lawmakers, a 5% difference could become a bridge too far.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

Events

Tech tools of tomorrow: Innovations your firms can't live without in 2020

Gadget Girl hits the tech pavilion at Pershing INSITE to see what exciting new tools advisers can't afford to miss.

Video Spotlight

Will It Last As Long As Your Clients Do?

Sponsored by Prudential

Video Spotlight

The Catalyst

Sponsored by Pershing

Latest news & opinion

Brian Block's $4 million bonus was tied to a key metric at ARCP

Prosecution rests case in fraud trial against CFO of American Realty Capital Properties.

Edward Jones is winning the Google search war

Brokerage firm's digital marketing investment helps land it at the top of local and overall search engine results, report finds.

Voya's win in 401(k) fee suit involving Financial Engines bodes well for other record keepers

Fidelity, Aon Hewitt and Xerox HR Solutions are currently defending against similar fiduciary-breach claims.

Collective investment trusts getting more attention from 401(k) advisers

The funds are catching on due largely to lower costs and more product availability, but come with some inherent drawbacks.

Vanguard rides robo-advice wave to $65B in assets

Personal Advisor Services, four times the size of its closest competitor, combines digital and human touch.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print