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Stock Dividends May Be an Attractive Tax Strategy for Long-Term Shareholders, Marcum LLP Says

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New York City, NY – Stock dividends may be an attractive tax strategy for long-term public company shareholders, according to Joseph J. Perry, Firm-Wide Partner-In-Charge of Tax and Business Services at Marcum LLP, a top national  accounting and advisory firm.

According to Mr. Perry, “Providing a stock dividend to shareholders might be a good idea to consider in light of the election turnout. If you assume that dividend tax rates will go up next year, it is prudent to help your long-term shareholders before December 31. There are two ways to do this. The first is to pay out any cash dividends before year-end. The dividends would be taxed at the current 15 percent rate instead of the new higher rate, which could potentially be as much as 39.6% (plus a 3.8% Medicare surtax) if dividends end up being taxed as ordinary income.

“The second way is to simply pay a stock dividend. A stock dividend is generally not taxed until the stock is sold. So investors can defer taxes until they sell their shares. If a long-term shareholder holds the shares for more than a year, he will receive capital gains treatment on the eventual sale. This is the case even if they sell shares the day the dividend is paid in order to convert the stock dividend into cash. This is accomplished by selling the shares on a first-in-first-out basis. The long-term gains rate might be higher than it is today (President Obama has proposed 20% versus 15% currently), but it will not be subject to the highest individual rate of 39.6%.In essence, the stock dividend puts shareholders in the same position they would be in with a cash dividend, but it gives them the ability to reduce the tax impact,” Mr. Perry said.

He offers this example:  If a shareholder has 100 shares of stock that he’s held for 5 years, and he receive a 10% stock dividend, he would have 110 shares after the dividend. If he does not sell the stock, he does not have a gain until he does so. His basis in the 100 shares will now be allocated over the 110 shares. So if his basis was $1 a share in the original 100 shares, then his new basis in all the shares is now approximately 91 cents a share. If he sells 10 shares on the dividend pay date or later on a first-in-first- out basis, which is based on the individual’s method of selling any and all his stock holdings, he will receive a long term capital gain on the shares he sells. He would be taxed at the prevailing capital gains rate, which is at present lower than the projected dividend rate.

Mr. Perry has an in-depth background working with publicly traded companies and serves on the board of a publicly traded community bank, where he is Chairman of the Risk Committee and is a member of the Audit and Compensations committees. To reach Mr. Perry, email joseph.perry@marcumllp.com.

About Marcum LLP
Marcum LLP is one of the largest independent public accounting and advisory services firms in the nation, with offices in major business markets throughout the U.S., Grand Cayman and China. Headquartered in New York City, Marcum provides a full spectrum of traditional tax, accounting and assurance services; advisory, valuation and litigation support; and an extensive range of specialty and niche industry practices. The Firm serves both privately held and publicly traded companies, as well as high net worth individuals, private equity funds and hedge funds, with a focus on middle-market companies and closely held family businesses. Marcum is a member of the Marcum Group, an organization providing a comprehensive array of professional services.

 
Joseph Perry

Partner-in-Charge
Tax & Business
Melville, NY
 
 
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