"And pretty much of a nightmare for the tax filer too.... "
It's Bush's plan to help at least one segment of the economy: professional tax preparation services and accountants.
"...as the nonrecurring deemed dividends are accrued in the cash-corrected depletion balance, 18.75% of the deemed dividends are to be excluded from the baseline Alternative Minimum Tax (AMT) basis level, this level having been corrected by a 2.2x multiplier from the 4-year-averaged dividend flow already taxed at normal income rates..."
Personally, the more I read of the "deemed dividend" scheme, the worse it looks. Several of the analyses have been couched in terms of an investor with, say, 100 shares of Microsoft (or Intel) stock. If Microsoft pays $1 per share in the new tax free dividends, the investor "saves" about $38 by not having to pay ordinary income tax on the $100 in dividend income.
The argument is made (see several stories today by using Google News) that if MS uses the "deemed dividend" to issue a $2 chit to the investor, redeemable by raising his basis value by $2 per share, then his savings are approximately 20% of the $200 saved by the increase basis value, or about $40.
A wash if he plans to sell all of his 100 share holdings.
Ah, but what of those who have more substantial holdings and who do not intend (for various reasons, including the tax hit) to sell their entire holdings? Consider a person with 100,000 shares of Microsoft (or Intel).
Under the earlier notion of a tax-free dividend, those 100,000 shares could generate $100,000 in tax-free income (to first order...there are still issues of AMT, etc. probably lurking about). Not a bad piece of change, and a nice tax savings! This could encourage more people to acquire stocks just for the living income.
But if Microsoft goes the "deemed dividend" route, it issues a $2 deemed divident chit per share that ONLY APPLIES TO SHARES SOLD. If our investor sells 1000 shares of Microsoft at $100 (to pick a round numbers example), with his purchase price basis increased by the $2 per share chit, then his savings are 20% x $2000. A measly $400. He still pays the 20% taxes on most of the capital gains.
In other words, he only gets the full benefit of the deemed dividends if he sells _all_ of his holdings.
(This is because the deemed divident chit is on a per share basis, not a total amount. And only for shares sold! Things would be different if he could take a $2 per share chit on all of his shares, whether he sold the shares or not, and use the $200,000 chit (his holdings times the chit) to offset any capital gains. But such is not the case, by my reading.)
So as I read the fine print, investors like ourselves in tech stocks will see little or no benefit. Companies like Microsoft and Intel will very likely _not_ be giving us substantial tax-free dividends. They will use the deemed dividends feature and our savings will be miniscule. Unless we sell the whole batch, which may be the intent of the fine print, to get those capital gains recorded as quickly as possible, on account of the drastic budget crisis.
Sleazeballs.
--Tim May |
