With January 1, 2013 and the Affordable Care Act (ACA) Medicare Surtaxes rapidly approaching, we are recommending that C-corporations and even S-corporations with Earnings and Profits (E&P) pay their dividends prior to December 31, 2012. While we don’t fully know what Congress will do to resolve the fiscal cliff issue, we do know that the 3.8% Medicare Surtax of ACA will be applicable in 2013 and most likely the base dividend tax rate will increase. Therefore, the tax rate on dividends is likely to be at least 24.6% in 2013 vs. the 15% that exists in 2012.
With interest rates lower than the anticipated tax rate increase, even if a company needs to borrow the funds for a short period, the arbitrage on the tax savings makes the move well worth the effort. In fact, many publicly traded companies are declaring year end dividends, to save their stockholders significant amounts in taxes.