NEW YORK (AP) -- When tax experts find the government's proposed dividend tax cut tough to decipher, it's no wonder the rest of us are confused over who could potentially get what when.
As details of the new plan have emerged over the last week, the only thing clear is that this is hardly an across-the-board dividend tax cut.
In fact, it seems to be filled with more exceptions than rules when it comes to what kind of investments actually get the tax breaks. And it includes some tricky provisions that could even encourage corporations to not issue dividends.
When President Bush first announced his plan to end the double taxation of dividends as part of his broader economic stimulus package, it sounded simple enough.
Advocates pointed out that companies pay taxes on their earnings, so it would be counting twice if investors had to pay taxes on that money, too.
The public-relations spin from Washington has focused on how this will benefit the economy and the stock market.
The logic is that a dividend-tax cut would spur investors to buy dividend-paying stocks, which will give them frequent returns on their investments that they could then plunge back into the stock market or use for personal spending. Companies, in turn, see higher stock valuations, which could spur them to start spending again. And all that helps the economy.
It should only be that easy.
That's because this plan, which is under review by Congress, isn't a one-size-fits-all tax break on dividends.
''Most of the benefits would go to relatively few wealthy households, who aren't likely to spend enough of their windfalls to generate much of a 'trickledown' boost to the economy,'' Edward Yardeni, chief investment officer at Prudential Financial in New York, wrote in a recent report.
If you are a U.S. investor who holds mutual funds or individual stocks in a taxable account, you have the best chance of this working for you.
But there are plenty of reasons it won't.
Companies don't pay taxes when they lose money. So if you invest in a company that has a loss one year and you still receive a dividend payment, you have to pay taxes on it.
And if a company pays more in dividends than it earned, you can get partially taxed on that money, too.
Those people who invest in real-estate investment trusts or foreign companies, including U.S. companies incorporated abroad, will likely see no benefit. Shareholders of certain types of preferred stocks may not be eligible for the tax cuts, either.
There also won't be any additional tax breaks for dividends paid by stocks held in tax-deferred retirement accounts, like pension funds and 401(k)s.
Tobias Levkovich, senior institutional equity strategist at Salomon Smith Barney, also points out that the new regulations might require a minimum holding period for stocks before you could even qualify for the tax benefit.
And if all that isn't confusing enough, there's even more to trip you up.
There's been so much talk about how the dividend tax cut could pressure more companies -- especially cash-rich technology firms -- to issue dividends as a way to woo investors.
But parts of this plan may actually have the opposite effect.
Buried in the fine print is a complicated provision that would essentially reduce the capital-gains taxes investors have to pay on stock profits.
Rather than paying dividends, companies could continue reinvesting their earnings back into their businesses and instead issue a paper tax credit, called ''deemed dividends,'' into something called an excludable dividend account (EDA).
Then, when investors go to sell their stock, they can deduct this deemed dividend from any capital gains. That would reduce the taxes investors have to pay.
Let's say an investor bought stock for $55 a share, and later sold for $100. That would be a capital gain of $45, which would be taxable on under current rules.
But under the new plan, a company would accrue money in the EDA over time. When the investor sells, the deemed dividend credit can go toward a tax savings.
How the EDAs and deemed dividends will be calculated and tracked is still murky, raising questions even from tax experts.
''The problem with all of this is that EDAs are hard for investors to come to grips with. It is part of a company's tax payments so they are hard to get from the financial statements,'' said Robert Willens, managing director and tax and accounting analyst at Lehman Brothers.
No one is saying that cutting dividend taxes won't have its benefits.
It is figuring out who will really see those benefits that is tough.
Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org
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