Impending tax increases on capital gains and dividends – detailed in the table below – will hit seniors particularly hard.  Seniors will feel the impact not just in terms of the higher taxes paid on realized capital gains and dividends, but also in terms of depressed values of stocks – whether held directly, held through taxable mutual funds, or held through tax-advantaged IRAs and 401(k)s – upon which seniors rely to supplement their Social Security benefits.  These higher taxes – and evaporated wealth¹  – will cost many seniors the income they depend upon to pay for housing, food, medical care, and other monthly bills.

According to two 2010 Tax Foundation studies of IRS data taken from 2008 tax returns (which can be found here and here), Americans over the age of 65 earn the bulk of all dividend and capital gains income, considerably more than any other age group.  Specifically, the Tax Foundation found that, in 2008, seniors:

• Earned more than $77 billion in dividend income, a figure representing 48 percent of total dividend income earned by all Americans that year; and    
• Earned more than $150 billion in capital gains income, a figure representing 30 percent of total capital gains income earned by all Americans that year.

New estimates from JCT confirm just how hard the Democrats’ 2013 tax hikes on investment income will hit the retirement savings portfolios of America’s seniors.  According to JCT, 9 million tax returns filed by seniors will face higher taxes on investment income as a result of Democrats’ 2013 tax hike.  This represents half of all tax returns filed by seniors, each of whom will have to pay an average of $1,700 in higher taxes – a particularly onerous burden for seniors living on fixed incomes.  According to JCT, those 9 million returns from seniors will represent more than one-third of the 26 million total returns facing higher investment taxes next year.

For 2011 and 2012, the estate tax has featured an exemption amount of $5 million and $5.12 million, respectively (the exemption is indexed for inflation), with the assets of taxable estates subject to a top rate of 35 percent.  Unless the Democrats who control Washington act, however, the reach of the estate tax will be dramatically expanded next year, with an exemption amount of only $1 million (not indexed for inflation) and a top rate of 55 percent.  In many cases, the estate tax represents double or even triple taxation:  the taxpayer paid tax when the income was earned, paid tax again on dividends or interest when that after-tax income was later invested, and then the estate must pay tax on the assets purchased with that previously-taxed income before those assets can be passed on to the taxpayer’s heirs.

Many seniors have spent their entire lives working, saving, and investing their assets to be able to pass along the fruits of their labor to their children and grandchildren.  But if the Democrats’ 2013 tax hike is allowed to take effect, seniors who have accumulated assets of only a dollar more than $1 million – including seniors whose primary asset is a home that happens to have appreciated significantly in value over time – will once again find their estates subject to the death tax.