December 2012 Special Dividends & Taxes

With the impending Fiscal Cliff of expiring tax rates and the Affordable Healthcare Act (Obamacare), Oracle became the latest company to announce a special dividend to be paid in 2012 instead of 2013.    As of Wednesday of last week, 173 companies had announced a special dividend according to the Wall Street Journal. Should the current tax rates on investment income be allowed to expire, the rates could increase from the highest rate at 15% to nearly 39.6%.  With the additional 3.8 % and .9  surtax on investment income on high income taxpayers, the highest tax rate on investment income suddenly becomes nearly 45%.  

By speeding up the dividend payment to 2012 instead of 2013, companies are ensuring that the taxes rates on investment income will be  0%, 10%, and 15% instead of the potential 2013 tax rate of 28% (ie 45%).  For example, $100,000 of investment income would have a tax of $15,000 at the current 2012 highest investment income tax rate of 15%.  Under the potential 2013 rates, the same investment income of $100,000 would have taxes of nearly $45,000 for high income earners.  Even at a rate of 31.8%,  the tax would be $31,800 for the same amount of income.  By paying the dividends in 2012 instead of 2013 in our example, the taxpayer investor would be able to save over $16,000 .

Some investment expects expect that companies beginning in 2013 will cut back the amount of dividends they pay to investors due to the higher investment income rates.   Leave your comment below on whether you expect companies to cut back on the amount of dividends beginning in 2013.


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