by Brent J. Taylor, CPA

If you’re a shareholder in a closely held C Corporation, some of your tax rates related to your individual tax return are about to change starting in 2011.  If the company you are a shareholder in pays you a dividend this year, the maximum federal income tax rate will only be 15%, and the same 15% rate will apply to 2010 corporate payouts or stock sales that generate long-term capital gains.

However, the new rates in 2011 will mean both higher taxes on dividends and higher taxes on long-term capital gains.  The maximum federal rate on dividends will automatically jump from 15% to 39.6% on January 1, 2011.  President Obama has been quoted as saying that he will limit the maximum rate on dividends to increase only to 20%, but Congress has not acted on that yet.  Also, on January 1, 2011, the maximum federal rate on long-term capital gains will automatically increase to 20% from the current 15%.

So, you’re now facing an upcoming increase in these federal tax rates, but luckily you still have some time to take advantage of this year’s low tax rates on dividends and long-term capital gains.  The following are some tax strategies to work on right now, while the rates are still low.

  • Consider some corporate distributions to shareholders.  With the federal tax rates on dividends set at 15% in 2010, the taxes on these dividends will be much lower compared to what the taxes will be in 2011 and beyond.
  • Another way to get some cash out of your business at lower tax rates this year is with a stock redemption deal.  This is where you sell back some or all of your shares to the company.  To the extent of your corporation’s E&P balance, any stock redemption payment is usually treated as a taxable dividend.  It would be a good idea to have this take place in 2010 while the federal rate is still 15%.
  • Finally, selling shares this year and paying 15% on any gains you have will be better than paying the 20% or more on gains from sales in later years.

For assistance with these strategies or for a consultation regarding tax planning Contact Us for an appointment today.