Paying Dividends May Lower Taxes and Provide Significant Savings

Tax planning has never been more important with the recent increases to individual income tax rates, the Net Investment Income Tax and the increased Qualified Dividends Tax rate. The more common entity types being partnerships and S-Corporations, which are flow-through entities, have been the entity of choice for most new entities. These flow-through entities have the advantage of a single level of taxation paid by individuals. C-Corporations are taxed at the corporate level on income and then again at the individual shareholder level. Excess profits earned in the corporation can be paid out as a year-end bonus (wages) or paid out as dividends. If a year-end bonus or wages are paid, the corporation can deduct these payouts while decreasing the income of the corporation, resulting in a reduced corporate tax liability. However, these wages paid out are taxed to the individual at ordinary tax rates.

Another option is not taking a year-end bonus and distributing the excess profits as dividends. These dividends to the shareholder could qualify for the preferred qualified dividend rate of 0 – 20%. This rate is almost half of the highest individual income tax rate of 39.6%. These rates do not include the additional 3.8% Net Investment Income Tax for those whose modified adjusted gross income (MAGI) exceeds $250,000 married filing jointly ($125,000 if single). Spending a few hours comparing your options could result in significant tax savings.

Contact Anders or your tax advisor for all of your tax planning needs.