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Last Minute Planning for Corporations Who Anticipate Making Dividend Payments

December 18, 2012

C corporations planning to make a dividend payment to its shareholders should declare and pay them by December 31, 2012.

As the parties in Washington appear intent on playing a game of “Chicken” as we approach the fiscal cliff, some last minute corporate planning around the declaration and payment of dividends may be in order for the end of the calendar year. For those businesses that are organized as Subchapter “C” corporations (or “S” corporations with former “C” corporation retained earnings) that are planning to make a dividend payment in the near term; it would be advisable to make sure those dividends are declared and paid before December 31, 2012 in order to take advantage of the current low dividend tax rate.

If Washington doesn’t pass a tax bill by the end of the year, the dividend tax rate is scheduled to automatically rise to as high as 39.6% for top earners as of 1/1/2013. U.S. dividends are now taxed at 15% for the top four brackets and zero in the lowest bracket.

In 2003, President Bush and Congress cut taxes on capital gains and dividends, which mostly affect higher income taxpayers. These cuts are set to expire at the end of 2012.

The current Obama Administration proposal would raise dividend taxes back to ordinary income tax rates. Many analysts are starting to believe there may be hope of limiting the increase to a dividend tax of 20%, based on a Democrat proposal introduced in the Senate. The Republican House proposal would leave the dividend tax rate at 15%.

Adding to the increase is the new investment tax of 3.8% from the recently enacted health care Act. This investment tax effects many higher income earners and would be on top of whatever dividend tax the parties end up passing.

While much remains to be decided, a C corporation planning to make a dividend payment to its shareholders, it would be best to declare and pay it by December 31, 2012. This would at least eliminate the uncertainties and lock in 15% tax treatment for the company’s shareholders in 2012.

It is sure to be a wild ride all the way to the final days of the year. Any steps that can bring some certainty to an uncertain situation should always be considered. For more information on this topic please contact any member of our Tax Service Team. Read more on the latest tax information, year-end planning and updates please visit the KLR Tax Blog.

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