Over the next several months we are going to hear quite a bit about whether or not dividends, including some preferred stock dividends, should continue to be taxed at a lower rate than regular income.
Since preferred stock investors invest for dividend income, one is tempted to think that proposals to raise the tax rate on such income would be detrimental to such investors. And, to a limited extent, it would be. But as I am about to explain, for the most part, ending the favorable tax treatment that is applied to the dividends generated by a select group of 255 preferred stocks is largely irrelevant to risk-averse preferred stock investors.
One of the objectives of the Tax Reform Act of 2003 (officially called "The Jobs and Growth Tax Relief Reconciliation Act of 2003") was to provide an incentive to investors. Prior to the Act, most dividend income was taxed at higher regular income tax rates. The Act authorized a new dividend tax rate capped at 15%.
Sounds great. But by the time a risk-averse preferred stock investor applies the law to the preferred stocks trading on U.S. stock exchanges, it is not as clear that the Act is as effective as was once hoped...
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Tuesday, February 21, 2012
Tax-Advantaged Preferred Stocks: Does It Really Matter?
