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Friday, 01/24/2003

If George W. gets his way with the dividend exclusion who REALLY wins!
by Steve Gail

The reality is that the President's plan would eliminate the "double" taxation of dividends for millions of stockholders and allow taxpayers to exclude dividend payments from their taxable income, which is currently taxed as "ordinary" income

So what is the big deal?

Well, that should put almost $25 billion greenbacks back into this staggering U.S economy.

So who would really benefit from this plan?

Well, nearly almost 40 million families will benefit under the President's plan and more than half of these dividends should go to America's seniors who are the main recipients of these dividends. These elder individuals rely on those dividend payments as a significant source of their retirement cash flow, and presently these dividends are not only taxable, but are actually taxed twice, or subjected to what is un-affectionately known as "double taxation".

So, what is double taxation again?

"Double taxation" is when the Internal Revenue Service taxes a company on its profits, then turns around and taxes the investors who received those profits as dividends.

So, what is the net effect of this "Double Taxation"?

The "net" effect of this double taxation is that only 35-40 cents of every dollar of profit a company could pay out in dividends, actually gets to the investor/shareholder. The bottom line is that the small investor is paying a greater percentage tax rate on their income then the rich investors is. That doesn't seem to fair, does it?

So, what will happen under the president's plan?

Well, under the President's plan, a company's profits would still be subject to taxation, but only the company NOT the individual shareholder/investor. Hence, there would be only one tax, and that would be at the company level. Therefore, the current tax paid by the individual investor/shareholder would be eliminated, which would in turn, mean more net income to be kept by the investor/shareholder. This is particularly important to those investors who are senior citizens that need a reasonably predictable cash flow, especially when living on a fixed income. It is estimated that slightly less then half of the total dividends that would be excluded would go to these senior citizens, with each senior receiving between somewhere between $900 - $1000.

How will dividend exclusions effect my Dividend Reinvestment Plan?

In the best of ways!. Now all the dividends that your company pays out to you in your plan that is used to purchase addition shares will be tax-free. But, you will still have to keep track of the dates you purchase ANY and ALL new shares with those dividend proceeds. Remember you are now purchasing a capital asset (STOCK) with those dividends and that stock that will be sold at a future time for either a capital gain or a capital (loss). So you still, must maintain accurate records to determine WHEN these shares become LONG TERM (Gains or Losses), as in regards to the HOLDING PERIOD; as well as, HOW MUCH of a LONG TERM CAPITAL GAIN you must claim if the aforementioned shares are held and eventually sold after a year and a day holding period. Remember if and when you sell your shares of stock, be sure to designate which shares you are selling by the DATE you purchased them. This is the only way to determine for IRS and tax purposes which shares are being sold especially when some shares are still going to be held. This will also allow you to sell FILO or LIFO. This could be important to you if you have significantly varying purchase prices due to dollar cost averaging.

So until, next week


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