Taxes are a sticking point going into the Presidential election, and the tax debate will put income generating stocks and municipal bond exchange traded funds into focus.
With the Bush-era 15% dividend tax rate slated to expire at the end of the year, many investors are concerned that higher tax rates would significantly cut into the returns out of dividend-paying equities.
Dividends received will be taxed as ordinary income after Jan. 1 if Congress lets the Bush-era taxes expire, with a maximum 39.6% rate, plus a new 3.8% tax to pay for the healthcare reform. [Dividend ETFs, the Fiscal Cliff and Potential Tax Hikes]
While higher tax rates would lower the after-tax value on dividend assets, companies are also raising their dividend payouts. [Dividend ETFs to Reap Record Quarterly Payout]
“Companies are responsive to investor needs and have a history of raising dividends to keep investors whole, which might prevent some of the damage to this area of the market,” according to a BlackRock research note. “Currently, corporate balance sheets are in pristine shape and dividend payout ratios are at historic lows, suggesting there is ample room for companies to increase dividend payouts.” [Taxes: Muni Bond ETFs at Risk?]