I wish the law allowed investors to reinvest the dividends and postpone the tax event. This would have improved the current skewed state.

I think this is unlikely to happen in the current climate; it would be seen as a tax break for the rich. It's frustrating to me how many otherwise good ideas are off the table as they would be seen as helping the rich get richer.

Look, for instance, at the proposal to reduce the deductible limits for retirement contributions.

it does? you don't pay capital gains on reinvested dividends

You are technically correct assuming your dividends aren't of the qualified variety. In that instance you don't pay capital gains, you instead pay full-fat income taxes!

Capital gains are, however, absolutely owed on qualified dividends.

In either case (with the added assumption that we're talking about securities held in a non-tax-advantaged account), your brokerage will send you an IRS form 1099-div.

https://www.investopedia.com/ask/answers/011215/if-i-reinves...

It's not capital gains, because nothing is sold, but dividend income is taxed, whether or not it's re-invested. Form 1040, line 9.

Dividend income on "qualified dividends" is taxed at the capital gains rate.

Sure, but just because two things are taxed at the same rate doesn't make them the same.

And I would argue that, in effect, the capital gains are taxed less because the tax is not taken out each year, and instead the capital is left to compound.

"...paid dividends (including capital gain dividends and exempt-interest dividends".

https://www.irs.gov/instructions/i1099div#idm140075526633184

I think that parenthetical section is calling out capital gains distributions (something common for mutual funds) and exempt-interest dividends in particular because they are not ordinary dividends.

"Capital gain dividend" does not mean the same thing as "qualified dividend."

Emphasis on "is taxed."

Capital gains is just the name for the tax rate for investment income. Qualified dividends are short term capital gains, ordinary dividends are long term capital gains.

https://www.irs.gov/instructions/i1099div#idm140075526633184

No, to be precise a "capital gain" is a specific type of income that a dividend is not.

Short term capital gain income is taxed as ordinary income. Long term capital gain income is taxed at a favorable rate called the "long-term capital gain (tax) rate."

You have the rates for qualified and ordinary dividends backwards. Qualified dividends the ones that get taxed at the same lower rate as capital gains income (i.e., they "qualify" for preferential tax treatment).

Pretty sure DRIP is still taxed.

It surely is, just the same as a dividend not-reinvested.

That's not double taxation. The corporation is a different legal person. When you receive income from a corporation, that transaction is taxed, just like when employees receive their income from their (usually incorporated) employers.

Yes it is. A stock buyback increases shareholders' wealth with a tax of 0% on the shareholders.

The tax code makes a bright line out of the distinction between income and capital that is, economically speaking, quite fuzzy. Depending on your need for liquidity and your means of acquiring it, it might not be really there.

The investor pays tax when the stock is sold. That tax implication is exactly the reason that many investors prefer buybacks over dividends.

In order to realize this tax free wealth gain, the shareholders would have to sell the stocks and pay taxes, right? It sounds like then the most important factor is not the double taxation, but that you get to choose when the "second" taxation occurs.

When the shareholder realizes the gain from the share price, that gain is taxed. And if it is a short-term holding, that income is taxed like regular income. Nobody is getting taxed at 0%.

If you have little or no ordinary income, a decent chunk of qualified dividends and long term capital gains pay 0% federal income tax. $77k for joint filers in 2018. [0]

Not a particular trustworthy site, but whatever:

[0] https://www.thebalance.com/how-to-use-the-zero-percent-tax-r...

It is, in this case "double taxation" is a term of art and denotes the shareholders' perspective because the shareholder is taxed first on corporate income (as "owners" of the corporation) and second on receipt of their dividends (as part of their individual income).

https://www.investopedia.com/ask/answers/03/102203.asp

A corporation is a separate entity from a shareholder. If a company's corporate income and a shareholder's personal income are the same, surely we should also be OK with lawsuits against corporations also digging into the pocketbooks of shareholders.

That distinction exists for a reason.

The distinction exists for a reason, but that reason doesn't in itself require taxation to happen twice. If I am in business I can pay tax once or, as the owner of a corporation, potentially pay tax twice. I will obviously prefer the former.

Since, as you say, the corporation is legally distinct, whether I own the whole corporation or just part of it is neither here nor there. My objection is the same, which is that there are two tollgates between me and what I see as my share of the income.

Australia's corporate tax system allows for "franking credits". Shareholders receive these from companies based on their proportional ownership. The income tax paid by the corporation may be offset against the income tax owed by shareholders.

Unsurprisingly, Australian companies are much more likely to pay dividends.

Can Australian companies spend unlimited amounts of money on political propaganda without the assent of all their shareholders?

He's not making a normative/semantic claim, he's describing why it's not financially sensible. If I'm considering two ways to transfer money to a target, and one of them passes through a taxation checkpoint twice, I'm naturally going to avoid that.

I am happy to make the normative statement that any tax code that creates such an incentive probably is badly designed, though.

I'm having trouble making sense of your comment. Do you want to break it down for me?

I read your comment as responding to dman under the assumption that he was arguing (1) this taxation scheme qualifies as "double taxation" under some notable definition, (2) double taxation is wrong/bad, and therefore (3) this taxation scheme is wrong/bad. I think in fact he is not claiming any of these, he's just explaining how the incentives faced by the actors drive their behavior.

If you were not actually arguing along these lines and were merely correcting his terminology without rebutting his main point, I would have expected you to preface your comment to this effect, e.g., "Not disputing your point, but technically this doesn't qualify as 'double taxation' because...".

Apologies if I've misinterpreted.

This is different from the employee context because the corporation gets to deduct the compensation expense. So it's a deduction to one party (corp) and an income inclusion to the other party (employee).

Your income from your employer is not taxed on the corporation. It's a cost of doing business and is tax deductible.

Many are qualified dividends so they are taxed as long term capital gains if you’ve held the stock for at least 60 days. If you are wealthy and don’t draw an ordinaryincome then this also means your tax rate is 0% on your qualified dividends.

Only on the first ~$77K worth, which is probably less than the annual dividend plus capital gains income for a wealthy person.

> * If you are wealthy and don’t draw an ordinary income then this also means your tax rate is 0% on your qualified dividends.*

Really? I thought qualified dividends were taxed at the same rate as long term capital gains. This is zero for very low-income taxpayers, but certainly not "wealthy" ones, like you describe. Or perhaps I'm missing something?

There's a difference between high income and wealthy. If you're wealthy, and you retire, you may not have a current ordinary income, so that any LCTG is all within the 0% rate; if your total taxable income is less than $38,600 for single filers, or $77,200 for joint filers; in connection with the standard deduction of $12k or $24k. If you make assume no other income, that's just about $50k or $100k of untaxed LTCG, in addition to whatever returned capital you need to spend.

The trick is somehow the popular media has changed the word wealthy to mean high income instead of, you know, having wealth.

I'm aware of the distinction between wealthy and high-income (was a tax lawyer in a former life). I was objecting to the if-then in the prior post that said: if you're wealthy and don't have OI, then your dividend rate is 0. This is not true. It is only true for the first chunk of income, as you note.

Also, this is equally true for LTCG, so in the context of this discussion (qualified dividends versus buybacks, which increase LTCG), it doesn't move the needle one way or the other.