Capital Gains and Dividend Tax Treatment

Capital Gains and Dividend Tax Treatment Name: Institution: Question 1 When the companies buy back the share from the market, they have two ideas in mind, to increase their value as well as reduce the risk that is associated with the stakeholders that would want to have the controlling stake in the company (HYPERLINK "http://smallivy.wordpress.com/author/smallivy/" \o "View all posts by smallivy"smallivy, 2012). This is because, by buying back the shares, the will reduce the availability of their shares in the market (supply). One of the effects of the repurchase is as the firms intend, a raise in the value of the shares. This therefore means that the investors are bound to be making capital gains (Defend My Dividend, 2010). If this increase in value takes place the shareholders also stand to benefit from the prime chance of deferring the capital gains. On the negative the buyback can be used to manipulate the expectations of the stakeholders, hence it is not always a good thing. In some of the cases, it is the earnings that are manipulated, especially where the estimates are made using a higher number before the execution of the buyback (Defend My Dividend, 2010). Share repurchase has an effect on the income statement, specifically as pertains to the income taxes. This is because the dividends also get taxed the same way as the normal income within the time or year received. Where the stocks are held for a period exceeding one year, this lowers the capital gains. Question 2 The latest law on the taxes imposed on the dividends is the Tax Increase Prevention and Reconsolidation Act of 2005. As it was witnessed in the year 2003 before the tax on dividends was reduced by an Act of law, previously, due to the high taxes on dividends, the number of firms paying dividends had also reduced. By extension, when there is an increase in the tax on dividends, this means the dividends value that gets to the investor is reduced so is the value of the capital gains (HYPERLINK "http://smallivy.wordpress.com/author/smallivy/" \o "View all posts by smallivy"smallivy, 2012). Consequently the pension plan is going to drop in value, as the taxes impact negatively on the income payable as dividends. References HYPERLINK "http://smallivy.wordpress.com/author/smallivy/" \o "View all ...