Senate Republicans Reach Agreement on Dividend Tax Controversy

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President Bush's tax bill has met more than a few snags as it makes its way through Congress, not the least controversial of which is the attempt to do away with the income tax on dividend income. Now it appears that a possible stalemate over this issue has been circumvented.

In his State of the Union address this year President Bush stressed the importance of ending the income tax on dividends. "It is fair to tax a company's profits. It is not fair to again tax the shareholder on the same profits."

Now it looks like Republican members of the Senate Finance Committee, the group that writes tax legislation, have decided that it's fair to tax the shareholder on some of the profits.

Republican tax writers agreed on Wednesday to include a provision in the tax bill to eliminate income taxes on the first $500 of dividend income. According to Senate Finance Committee Chairman Charles Grassley (R-IA), this exclusion would eliminate taxes on all dividend income of 86% of the nation's taxpayers.

For the 14% of dividend recipients who receive more than $500 per year in dividend income, there are additional benefits. For the next five years, 10% of dividends received in excess of $500 would be exempted from federal income tax. For the following five years, 20% of excess dividends would be exempted.

Depending on how one looks at the dividend taxation issue, this change in the tax law would save taxpayers or cost the government approximately $80 million over the next 10 years. Lawmakers anticipate that tax on new revenue sources will replace the government's decrease in dividend-related tax dollars.

Other elements of the Senate version of the tax bill include an increase in the Child Tax Credit to $1,000, a reduction of the marriage penalty, and an acceleration of the decrease in regular income tax rates.

The Senate Finance Committee is expected to vote on the revised tax bill on Thursday. If the bill passes out of the Finance Committee it is expected to be voted on by the entire Senate next week.

The House of Representatives is working on its own version of a tax cut bill which is similar to the bill moving through the Senate. In the House version, dividend income would be taxable, but at a lower, fixed rate of 15%. The Child Tax Credit would be increased to $800 instead of $1,000. The House is expected to vote on its version of the tax bill on Friday.

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