“Crafty bosses like Steve Jobs and Warren Buffett don’t let their companies declare dividends. That’s because these payouts get clobbered by taxes. At the moment the federal tax rate on dividends is 15%, but the rate is set to triple next year,” William Baldwin writes for Forbes. “The smart way for a corporation to pay out loose cash is with share buybacks. So the $10 billion buyback part of Apple’s announcement today is Jobs-smart. The $10 billion annual dividend, to begin this summer, is dumb.”
Baldwin writes, “Why is Apple initiating quarterly payouts? Because the mob wants it. Evidently the stock has been doing well in the past six months not just because iPhones are selling so well but because experts have been anticipating this big dividend announcement. But Steve Jobs was not one to let popular fashion, on Wall Street or elsewhere, tell him what to do.”
“For the 2012 tax year, the federal rate on most cash dividends is 15% and so is the rate on long-term capital gains,” Baldwin writes. “Next year the divergence between dividends and long-term gains is destined to get wider, absent any agreement between President Obama and Congress on extending the Bush tax cuts. Dividends will be taxed as ordinary income at rates up to 39.6%. The rate on long gains goes to 20%. Then there are surtaxes. Beginning next year, Obama’s 3.8% surtax on investment income kicks in for people with adjusted gross income over $250,000. There’s also a clawback on itemized deductions that effectively adds 1.2 percentage points to the tax bracket for most taxpayers.”
“All this adds up to a 44.6% maximum federal rate on dividends and a 25% rate on long-term gains,” Baldwin writes. “Moral: Own Apple in your 401(k) or IRA.”
Read more in the full article here.