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You are here: Experts > People/Relationships > Retirement Planning > Mutual Funds > tax break on dividends
Expert: Warren Boroson
Date: 9/9/2005
Subject: tax break on dividends
Question
Hello,
Thank you first of all for taking my question.
I've been considering buying a Vanguard mutual fund which invests in dividend paying stocks. This investment will be for the long term (10 years or more) and I like the idea of receiving income through dividends while waiting for capital appreciation.
One of the main reasons for my interest in purchasing the dividend –income mutual fund is because of the somewhat recent tax break on dividends. However, I understand that there is a “sunset” on this tax break on dividends and that it will expire in year 2008.
My question is this: what are the chances of this sunset provision being extended or the tax break becoming permanent? Can one know for sure or take an educated guess?
Answer
Dear Tom:
My guess is that it wil be extended--along with the 15% limit on taxes for long-term capital gains and the tax-forgiven status of money in 529 plans. These gifts are popular to be rescinded.
But the proposed abolition of estate taxes may go.
Lowering the taxes on dividends makes corporations more honest (instead of buying some other company with extra money, they will be under pressure to raise dividends); higher dividends might make the stock market less volatile.
I certainly think we're in for a tough time with regard to taxes in the future, and I hope that the government will raise tax rates.
And I also think that Vanguard Equity-Income, which I own shares of, is a good buy.
Good luck.
Warren
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