More public companies are expressing little confidence that Congress and the Obama administration will resolve the so-called fiscal cliff conflict before the end of 2012.
Accordingly, these companies are acting now to protect their shareholders from the likelihood of higher taxes in the new year.
Quite simply, some companies are accelerating the payment of regular and special dividends due in January to now be distributed to investors in late December. The move will assure the dividends are taxed at the maximum rate of 15 percent.
Part of the fiscal cliff changes would remove the preferential tax rate and result in dividend payments being taxed as ordinary income, a rate potentially as high as 38 percent. Even if a settlement is achieved, it is likely taxes on dividends will go up for people in higher income brackets.
On Tuesday, Brown-Forman, a maker of several alcoholic beverage products, announced a special dividend of $5 a share, and its regular quarterly dividend will be paid at the end of December rather than in early January.
“The company chose to make this payment in calendar 2012 because of the uncertainty surrounding the future dividend tax rates,” CEO Paul Varga said.
On Monday, Ethan Allen Interiors announced it will pay its regular quarterly dividend of 9 cents and a special dividend of 41 cents to shareholders on Dec. 20. The distributions were originally set for early January.
CEO Farooq Kathwari said the move “provides an opportunity for shareholders to have favorable tax treatment in 2012.”
Wal-Mart (NYSE: WMT) was one of the first companies announcing plans to pull its payment to shareholders into this year. The fourth-quarter payment will arrive on Dec. 27 rather than Jan. 2, as originally scheduled.
“There are complex fiscal and federal tax rate issues that may not be resolved in the next few weeks," a statement from Wal-Mart said. "In light of this uncertainty, the board determined that moving our dividend payment up by a few days to 2012 was in the best interests of our shareholders.”
There is no shortage of opinions about how the tax treatment of dividends will be handled in the negotiations to reach some type of legislative agreement on the expiring tax cuts. The administration wants to raise taxes — or eliminate deductions — for taxpayers with annual incomes above $250,000.
In some sense that would protect a large percentage of investors who rely on dividends as a source of income.
According to a study by Ernst & Young, 68 percent of filed tax returns with qualified dividend income are from people with incomes less than $100,000. It is possible the tax rate for them will remain at 15 percent or less.
The report also notes that U.S. households hold approximately $9 trillion in stocks, many of which pay dividends to investors.
Bottom line, with the arrival of the cliff just 33 days away, any move by a company to help shareholders reduce their tax liability is appreciated.