Dividends and tax planning

[Roland Slugg]

With the federal tax rate on qualified dividends currently the same as long-term capital gains, an excellent tax planning opportunity exists for clients who own C corps with accumulated retained earnings. Pay dividends!!

This is an especially attractive option for taxpayers whose taxable income is below the start of the 25% tax bracket ... about $32,000/$64,000 in 2007 for S/MFJ respectively. Qualified dividends (as well as LTCG's) falling below those taxable income levels are taxed at only 5%, and in 2008, 2009 and 2010 will be taxed at 0%. This is a temporary opportunity that should not be missed.

Depending on who wins the White House in next year's elections, this could change for 2009 and 2010, but the benefits should be safe for the years 2007 and 2008. State income taxes may be a moderating consideration, but probably not an inhibiting one in most cases.

Many taxpayers would be well served by advice recommending that they take steps to lower their 2007 and/or 2008 (and, perhaps, 2009 and 2010) taxable income by various techniques, including the funneling of itemized deductions into those years, thus lowering taxable income below the start of the 25% regular tax bracket and thereby increasing the amount of dividends and LTCGs that will be taxed at 5% or 0%.

[Corduroy Frog]

Will It Really Matter?

Interesting approach Roland. Dividend-out your corporation while rates are at historic lows, and not risk the Democrats raising the rates if they win. This is a perfect example of how tax discussions cannot entirely be divorced from politics.

After following politics for a number of years, I've come to the conclusion that the only real difference between Republicans and Democrats is rhetoric and appeal. Many people voted for Clinton because he campaigned against NAFTA, and once elected, became its biggest supporter. Four years earlier, people elected George H Bush as they "read his lips -- no new taxes." We all know how that turned out.

The halls of power are controlled by special interests irrespective of party, and the same forces control TV - the vehicle to win elections and re-elections. The "tax-and-spend" Democrats have never spent as much in real dollars as the current Bush administration over the last six years.

Is the 15% rate on dividends in jeopardy? Maybe. The stock market has responded dramatically since these preferable rates were implemented, and in spite of all the rhetoric from Democrats about "tax cuts for the rich" I hesitate to think they would do something drastic to tamper with this.

All of this discussion bodes poorly for those of us trying to tax plan. Aside from the 15% dividends issue (and capital gains for that matter), there is also the elimination of estate taxes (for one year only) in 2010. We have taken for granted that this was a mistake and congress would have done something about it, but it is nearly 2008 (legislatively) and nothing has been done. If your parents can live into 2011, a whole different scenario applies, because the estate tax returns with a much lower exemption.

One of the first 10 amendments to the constitution is a doctrine called "ex post facto" which prohibits the government from changing laws after a deed has been done. I wish we could hold their feet to the fire.