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Editor’s Note: We’re spending some time looking ahead to what is likely to happen to dividends under each of the remaining presidential candidates. As you may recall, 2012 was the best year for dividends since 1955, in part because of President Obama’s dividend tax policy. It’s likely that any tax code changes could cause another wave of giant, one-day payouts.
Click here to read my analysis of how Donald Trump could impact your dividends.
Hillary Clinton inspires vitriol or affection, depending on what side of the voting booth you’re on. But as with the other candidates for president, I’m not here to comment on her politics or likeability or how great her pantsuits look.
I’m focused only on her tax policies – particularly related to dividends.
Finding specific tax policy information on Clinton’s website was difficult. Difficult might be an understatement. It’s just not there as far as I can tell, and I’ve been a professional researcher and analyst for 20 years.
Thankfully, the people at the nonpartisan research group the Tax Policy Center have written a paper about Clinton’s tax platform. If this paper is accurate, then we can use this information to look at Clinton’s proposed plan to see how it might affect our dividends.
As an aside, and at the risk of politicizing this article, I am disappointed that Clinton fails to clearly share her tax policy. This kind of purposeful or careless obfuscation is disappointing for a potential leader of the free world.
If you quickly glance through the Tax Policy Center’s paper, you probably wouldn’t be too concerned about taxes. In truth, Clinton plans only to raise taxes by a small amount on most people. Even top earners will experience only a modest increase in their income taxes.
Specifically, the top 20% of taxpayers will see a 1.7% decrease in after-tax income. And you’re not in the top 20% unless you earn more than $142,000 a year as a single filer.
So for most people, the Clinton tax regime won’t directly impact their taxes – dividend or otherwise.
But indirectly, corporations will still likely decide to issue more dividends if Clinton ends up in the White House. That’s because most corporate insiders ARE in the top 20% of taxpayers.
As you might remember, in order to shield investors from increased taxes, American companies issued a record number of dividends in late 2012 …just before the dividend tax rate increase.
We could certainly expect the same thing to happen in late 2016 if Clinton wins the presidency. And that’s good news.
But in seeking information about dividend taxes, I found another aspect of Clinton’s tax plan that could certainly affect income investors.
In the table below (borrowed from the Tax Policy Center’s paper), you’ll notice a substantial increase in the top rate for all but one holding period.
Current tax laws differentiate between short-term capital gains (less than one year), and long-term capital gains (more than one year). Short-term gains are taxed like regular income, up to 43.4%. And long-term gains are taxed at a maximum of 23.8%.
But under Clinton’s tax plan, individuals in the top income tax bracket must own a security for six years to be taxed at the lowest capital gains rate.
If implemented, this change to capital gains tax rates would penalize those who own stocks for less than 6 years. That change could result in a wave of investors selling stocks and locking in gains before the capital gains tax rate increase.
A wave of expected selling could force companies to issue one-time dividends before Clinton’s inauguration, or it could mean a jump in corporations accessing debt markets – like we saw in 2012.
That’s because corporate boards recognize the likely outcome of a new tax regime, and would want to issue dividends before investors dump shares en masse.
To sum up:
A Clinton presidency wouldn’t directly impact dividend taxes – but it could cause companies to pay a wave of dividends ahead of her inauguration in order to avoid higher tax rates on top earners. There’s also a considerable concern that a Clinton win in November would cause investors to dump shares before Clinton enacts higher taxes on capital gains.
In the next issue, I will cover how a Bernie Sanders presidency might impact dividends. My preliminary research has uncovered some big surprises. So look for that message in your inbox in the next few days.
It’s happening. …On May 25, we’re finally revealing all of our dividend research during a live event. During this event, we’ll reveal details on how you can collect one-day payouts of 10%-60%.
Register now to save your seat…