Eliminating Taxes On Dividends

As was entirely expected, the lefties are playing the class envy card in their hysteria against the possibility of Bush proposing eliminating the double taxation on corporate dividends. "Tax cuts for the evil rich" is their mantra. Some recent examples of these anti-capitalism rants:

Washington Post Editorial

John M. Berry

Kenneth R. Bazinet

Assuming Bush can resist the desire to make his leftist critics like him, and dividend income becomes tax free to stockholders, it will change tax planning slightly. As I have explained for decades, using a C corporation allows you to reduce your taxes by tens of thousands of dollars each year. To avoid the double taxation, it has been my policy to never take out money from the corporation as dividends. We use expenses that are deductible by the corporation, such as wages, commissions, leases, interest and royalties. If dividends become tax free, these will be added to the equation and used when appropriate.

Shifting income to a C corp will still make a lot of sense. For example, if you are in the 35% bracket on your 1040, you can shift $50,000 to your C corp, where it is taxed at 15%. You will then be able to to have the corp pay you tax free dividends. That would save you $10,000 in Federal income tax alone ($50,000 X 20%). Since most business income would also be subject to the 15.3% Self Employment tax, by running $50,000 of profit through a C corp would save at least another $7,650 in that tax. The actual reduction in SE tax is normally much larger.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/10/2003 12:39:00 PM Send this post: