The 2001 Tax Act changed the way dividend income was taxed, taxing it at long-term capital gains rates of up to 15% rather than ordinary income rates of up to 35%. This act is set to expire at the end of 2010, meaning this special rate for dividends is about to disappear. Without congressional action (which is looking more and more likely) the individual rates are also going back to a maximum rate of 39.6%. There is now opportunity for taxpayers with dividend income to plan accordingly.
Owners of closely-held C Corporations need to look at their situation as it may be highly advantageous to increase their 2010 dividend payouts (possibly bailing out substantial retained earnings). Also owners of S corporations with accumulated earnings and profits (from when they were a C corporation) should also consider paying additional dividends in 2010. Your Contryman professional will be happy to help you take advantage of this planning opportunity.