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The History of Dividend Taxation: From 1913 to the Present


This is a guest contribution from Logan at the finance blog Money Done Right. Logan is a CPA, personal finance expert, and founder of the finance blog Money Done Right, which he launched in July 2017. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money.

If you’ve ever received a Form 1099-DIV and dutifully inputted it in your tax preparation software, you know that your dividend income is subject to income tax.

And if you own your own business that is taxed as a C corporation, you know that the dividend tax is essentially a double taxation on your corporate earnings: not only does your business have to pay corporate income tax on its own earnings, but you as a shareholder also have to pay tax on the dividend income you receive.

But it wasn’t always this way, at least not in the United States. This article explores the history of dividend double-taxation.

1913 – 1935: Exempt from Normal Income Tax

Could you imagine paying no federal income tax? For United States citizens, this was the not-quite Libertarian utopia that existed before the year 1913 when Congress passed the 16th Amendment:

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.

The silver lining for dividend investors, however, was that dividends were exempt from the normal income tax. Dividends would continue to be exempt all the way until 1936.

You can see on this original Form 1040 from the tax year 1913 that while dividends were included in “Gross Income” on Line 1, taxpayers could subtract their dividend income as a deduction on Line 4.

Source: irs.gov

However, those with very high incomes (i.e. greater than $20,000, which is more than $500,000 in today’s dollars) were subject to a surcharge on their income before the dividends deduction. For the most part, though, the average citizen would not have to pay income tax on dividend income until 1936.

1936 – 1939: Taxed at Ordinary Income Tax Rates

In the 1930s, the United States was in the dark days of the Great Depression, and there were several New Deal-era tax increases enacted during this decade.

One of these increases was the Revenue Act of 1936, which President Franklin D. Roosevelt signed into law on June 22, 1936.  Interestingly, the only companies still in the Dow Jones Industrial Average that were also included in 1936 are International Business Machines (IBM), Procter & Gamble, Chevron (then known as Standard Oil Company of California), and ExxonMobil (or at least the Exxon half, which was then known as Standard Oil Company of New Jersey).

In any case, this revenue act subjected dividend income to the individual income tax imposed on all taxpaying citizens.

You can see on this excerpt from the 1936 Form 1040 that dividends are included in income at the top but are not permitted as a deduction as they were previously.

Source: irs.gov

1940 – 1953: Exempt from Normal Income Tax

Throughout the 1940s and early 1950s, dividends were generally exempted from taxation, as they were before the Revenue Act of 1936.

1954 – 1985: Partial Exemptions and Credits

The year 1954 saw sweeping tax reform in the United States. The entire tax code was reorganized and changed.  While formerly the tax code was referred to as the “Internal Revenue Code of 1939,” it was now known as the “Internal Revenue Code of 1954.” This is what it would be known as until the Tax Reform Act of 1986, which changed the name of the tax code to — you guessed it — the Internal Revenue Code of 1986.

Beginning in 1954 and for the next 30 years, dividends were taxed at normal individual income tax rates, but with a certain exemption amount being excluded from tax. In 1954, this amount was $50 per individual.  A 4% tax credit was available for the amount of dividend income in excess of $50 per person.

This partial-exemption regime was the status quo for dividend taxation for the next three decades, with Congress changing the exemption amount as well as the tax credit from time to time.

1985 – 2002: Fully Taxable

For all the talk about the trickle down economics of Ronald Reagan, he holds the distinction of being the only president other than Franklin Roosevelt to sign into legislation subjecting all of a taxpayer’s dividend income to ordinary income tax rates.

2003 – Present: Ordinary and Qualified Dividends

President George W. Bush signed into law two acts, one in 2001 and one in 2003, that are together referred to as the “Bush tax cuts.”

The second act, called the Jobs and Growth Tax Relief Reconciliation Act of 2003, created a subcategory of dividends called qualified dividends.  These dividends would be taxed not at the ordinary income tax rates, but at the preferential long-term capital gains tax rates.

In order for a dividend to be considered “qualified” for federal income tax purposes, it must meet both of the requirements below:

In addition, certain types of dividends — such as capital gain distributions, dividends paid on certain deposit accounts, and dividends from a tax-exempt organization — cannot be qualified dividends.

Non-qualified dividends, commonly referred to as ordinary dividends, continue to be taxed at the shareholder’s ordinary income tax rates.

For the past sixteen years, this has been the tax regime imposed on dividend income in the United States.

Interestingly enough, Bush originally wanted to end the “double taxation” of dividend income.  Yes, he was actually calling for ending the taxation of dividends, insofar as the corporation paying them had already paid tax on the profits from which the dividends were being paid.

That said, this proposal was perhaps not thought through as well as it could have been. President Bush’s Treasury Department was not able to work out the details, and the administration was forced to compromise. Who knows?  Maybe one day we’ll once again see dividend income being exempt from income tax, as it was throughout the early 20th century.

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