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The President’s Jobs and Growth Plan: The Dividend Exclusion is Not Complex President Bush’s tax plan is based on a fair and simple idea: Tax corporate income once – and only once. This proposal makes the tax code fairer to investors, and it does so in a manner that is easy on both corporations and investors.
What Investors See – Increased Dividends The vast majority of investors are unlikely to see any increase in record-keeping. Taxpayer dividends will be reported in the same manner that dividends are reported now, on IRS 1099 forms mailed at the beginning of each year. For most shareholders, adjustments to their cost basis will also be made as they are made now – through their mutual funds or brokerage accounts. Most stock-owning households own their stock through mutual fund companies or brokered accounts. These companies already track basis adjustments on behalf of shareholders. Under the President’s plan, they would continue to make these adjustments. The Corporate Calculation – Tax-Free Dividends To calculate the amount of dividends that can be distributed tax-free to shareholders, a corporation will need to annually compute the amount – the Excludable Dividend Amount (EDA) – that reflects income that has already been taxed. Calculating this amount requires just one piece of information – a company’s tax liability from the return filed in the prior year. A corporation with $100 of income that pays $35 of U.S. income taxes will have an EDA of $65 that can be distributed as tax-free dividends. A corporation would report these excludable dividends to shareholders on the 1099 form, just as they report taxable dividends. The Corporate Calculation – Retained Earnings Shareholders of corporations that retain their taxable earnings would see a benefit as well. The cost of their shares would be adjusted upwards to reflect the value of the retained stock. For the corporation, this adjustment – called a Retained Earnings Basis Adjustment – requires just two pieces of information – the corporation’s EDA less any excludable dividends distributed to shareholders. For shareholders, REBA-related adjustments are excluded from taxes. When a shareholder sells his or her stock, whatever capital gain they incur is reduced by the total REBA-related adjustments. REBA adjustments will be reported on 1099 forms alongside excludable dividend amounts. |