Dividends in the Context of Taxation Environment

169849_taxOne the benefit that dividend investors have is lower tax percentage (i.e. 15%) on qualified dividends. In case of lower tax brackets, the qualified dividends are not even subject to taxes. In 2003, President Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act. One of provision in this law was to reduced the tax rates on certain dividends (known as qualified dividends) to 15% for the highest income earners. Furthermore, this provision are to expire at the end of 2010 if Congress fails to renew or modify. So far, it has not been extended.

Imagine that Berkshire had only $1, which we put in a security that doubled by year-end and was then sold.Image further that we used after-tax proceeds to repeat this process in each of the next 19 years, scoring double each time

At the end of the 20 years, the 34% capital gains tax that we would have paid on the profits from each sale would have delivered about $13,000 to the government. We would have left with about $25,250. Not bad.

If, however, we made a single fantastic investment that itself doubled 20 times during the 20- years, our dollar would grow to $1,048,576.

Were we then to cash out, we would pay 34% tax of roughly $356,500 and be left with about $692,000.

— Warren Buffett in Berkshire’s 1989 annual report.

continue reading rest of the article….

Personal Blogs - BlogCatalog Blog Directory ~