Big investors and insiders with big stakes in individual companies are getting a big gift this year: a massive tax break.
More than 600 companies announced plans late last year to either pay dividends early or cough up extra dividend payments in 2012. The dividends are enormous, totaling more than $14.4 billion just from the 30 companies in the Standard & Poor's 500 that made early or special payments.
Getting these dividends in 2012, rather than 2013, will be a boon for many high-earning investors come tax time, because the flurry of dividends were paid before dividend tax hikes kicked in for the 2013 tax year. Taxpayers in the highest tax bracket will see the tax rate on qualified dividends rise from 15% to 20% in 2013.
Investors who earn $200,000 or more stand to benefit from early dividends since they may avoid paying the new 3.8% Medicare tax on dividends paid in 2013. All told, higher-income investors stand to benefit most because their rate with the Medicare tax jumped to 23.8% -- and the sheer dollar value of the dividends they receive is so much larger.
Early dividends benefit all shareholders, says Jeffrey Hoopes, a doctoral candidate in accounting at the University of Michigan, who is researching corporate dividends. "But they can represent a lot more of wealth" for investors with large ownership stakes, he says.
Some of the savings for insiders are staggering, shown by the:
• Large insider ownership of companies paying the sped-up dividends. Many of the companies that opted to pay special or early dividends are making their insiders and big-time investors happy. Insiders and owners with large stakes in companies, including members of top management, own 12.5% of the shares of the 30 S&P 500 companies that sped up dividend payments, according to a USA TODAY analysis of data from S&P Dow Jones Indices and S&P Capital IQ. That's more than 10 times greater than the ownership percentage in the 30 companies in the Dow Jones industrial average.
• Massive dividend payouts that escape 2013's higher tax rates. Of the total $14.4 billion in sped-up dividend payouts by the 30 S&P 500 companies, more than $1.3 billion went to officers, directors and other large investors.
Given the size of the dividends, the tax break is also notable. By paying 2012's dividend tax rate, instead of 2013's, insiders and big investors face a tax bill of $309.4 million, assuming they're paying at the higher bracket for higher-income taxpayers on qualified dividends. That means these investors saved 37%, or $114 million, because the dividends were sped up or paid in 2012.
Source: USA Today | Matt Krantz