Dividends and the fiscal cliff

[Vanraw]

Dont know if you guys have been watching but a huge mass of companies are moving and upping one time dividends to the end of December as opposed to some time in 1Q. This is due to fear of the fiscal cliff. The motivation is "for investors" but the real benefactors are the very large share holders who will make 100s of millions (even 1.2 billion in one case) on the one time payout. The move is to avoid paying taxes at a higher rate.

Some of the moves are pretty aggressive. Some have already passed. Im jumping into a couple to catch a short term little dividend pop, but also looking at some targeted puts on stocks that will get dumped right after the pay out.

[Zirak]

Actually I thought folks were doing this because of the imposition of a dividend surcharge imposed by Obamacare starting in 2013.

[Grieve]

The main reason is that capital gains would jump from 15% to as high as 39.6% for some earners, or 31-36% for most of us. There's also a 3.8% Obamacare surcharge for high earners ($200k+ or $250k+ for couples), but that's pretty small compared to the main jump.

I was wondering about puts as well, but I'm assuming since everyone knows what will happen that that will already be factored in?

Yes, mostly this is to benefit insiders and big investors. For most of the companies who have done a special dividend, family members own the majority of the shares, and will benefit the most.

[Breand]

Actually I thought folks were doing this because of the imposition of a dividend surcharge imposed by Obamacare starting in 2013.

It's a double whammy combo, but the Obamacare side only affects the upper class.

The surcharge revolving around Obamacare is 3.8% on dividends for households making over $250k.

But if nothing is done with the dividend provision of the fiscal cliff the distinction between an ordinary and a "qualified" dividend goes away, which is taxed at a lower rate of up to 15%. Ordinary dividends are taxed according to your bracket. So you are talking about basically DOUBLING the taxes you pay on any qualified dividend. (Qualified simply means you hold on to the dividend for more than 60 days)

The latter situation is horrible to me, and is a huge tax hike on middle class people of our generation who are almost entirely reliant on our 401ks for retirement.

Taxing dividends is a joke. They are corporate profits that are already taxed. Then they tax you on it, when you get it. Then you get taxed AGAIN on whatever amount is sold as income!

[Slamz]

It will be interesting. Lots of finance articles are discussing people dumping stock before the end of the year in anticipation of higher taxes next year. Articles on AAPL in particular mentioned that after 4 years of growth, people holding that stock may be looking to cash out now. Good profits so far and possibly the last year of low taxes on capital gains; anyone holding will have to weigh the possibility of continued AAPL growth against the amount they will likely lose if taxes undergo an overhaul. (As one article put it, taxes on capital gains may go up. They will not go down. Nobody is going to hold in the hopes of lower taxes next year.)

I wonder if it would make sense to sell all long-term holdings right now and then use the money to just re-buy them. You would basically be cashing out all of your low-tax, long-term gains so far without changing your holdings. Any future gains will be against the new tax rates but at least you got the most out of what you already had.