What the New Tax Plan Means for Dividend Investors
As tax-reform proposals are analyzed and debated, we look at the differences between the House and Senate plans for income-oriented investors. Also, we look at the implications of GE’s dividend cut.
With all eyes on proposed tax reform, there are major differences for master limited partnerships (MLPs) between the House and Senate plans. Although under both plans MLPs will retain their advantage of deferred taxation, the House bill is more favorable to both MLPs and REITs. “There’s no denying that, if the Senate’s plan went into effect, it would scotch the rationale for forming new MLPs.” It might also “persuade existing partnerships to ditch the structure altogether.”
The “Tax Cuts and Jobs Act” bill proposed by the Senate Finance Committee has five limitations (“haircuts”) used to calculate the qualified business income (QBI) for pass-through entities (such as subchapter S corporations). “It’s a bit of a maze, but it could be a significant deduction and will take plenty of tax compliance work to determine and support it.” However, contrary to the stated goals of tax reform of simplification, “these haircuts make the tax code more complicated and will lead to confusing tax compliance.”
Investors should see General Electric’s decision to cut its dividend in half as a warning and continue to remain flexible. “Investors who depend on income in retirement or for other needs have gravitated to dividend stocks amid continuing low interest rates. GE’s move highlights how overexposure to dividend stocks can cause real problems.”