Joseph Perry, Partner-in-Charge, Tax & Business Services, Featured in CNNMoney Article "Dividend Investors Prepare for Fiscal Cliff"
By Ben Rooney
As negotiations over the fiscal cliff get underway in Washington, investors who crave the safety of blue chip stocks are bracing for big changes in how dividends are taxed.
Under the automatic tax hikes and spending cuts that could go into effect January 1, the qualified dividend rate would more than double for those in the highest income tax bracket. Dividends are currently taxed at a rate of 15%.
Yet the prospect of a higher tax rate has not diminished the appeal of dividend-paying stocks for many investors.
Joseph Perry, a partner at accounting and advisory firm Marcum LLP, said companies could help shareholders avoid the higher tax rate by issuing a special dividend payable before year-end.
In fact, a number of companies have already announced special dividends in recent weeks, including casino operator Wynn Resorts (WYNN, Fortune 500), U-haul parent Amerco (UHAL) and asset manager Waddell & Reed (UMUHX).
Perry also recommends stock dividends, which are issued in the form of shares rather than cash.
“A stock dividend is generally not taxed until the stock is sold,” he said. “So investors can defer taxes until they sell their shares.”
In addition to being able to defer taxes, investors that hold the stock for more than a year would be taxed at the lower capital gains rate if they decide to sell their shares, said Perry.