Early Dividends? Possible but not Likely

Enough about the "fiscal cliff." What about the dividend cliff?

At one second after midnight on Jan. 1, 2013, the maximum tax rate on dividends is likely to go from 15% to either 18.8% or 43.4%. The best-case scenario: Congress retains the top dividend-income tax rate of 15%, and the only increase is the scheduled 3.8% surtax on investment income for high earners. The worst case: Congress decides dividends are to be taxed at ordinary-income rates, and the highest rate jumps to 39.6%, plus the same 3.8% surtax.

Analysts say many companies are waiting to see what Congress does before they finalize their 2012 dividend payment plans. There are no significant tax or financial consequences for companies that speed up a dividend.

In just the first two weeks of January 2012, U.S. public companies paid $16.1 billion in dividends. If they pay at approximately that rate again, shifting those distributions a few days earlier so they fall before the end of this year would make a significant difference to investors' after-tax wealth.

There is some precedent for doing shareholders a favor by paying out income before it becomes taxable at a higher rate. Two years ago, when Congress also looked likely to jack up taxes on dividends, roughly two dozen companies accelerated their January 2011 payouts into December 2010.

That time, the dividend-tax rate stayed put after a congressional reprieve. This time, a rise to at least 18.8% from 15% is all but inevitable; the odds of a tripling to 43.4% are uncertain.


Source:  Jason Zweig, Wall Street Journal


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