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Keep an eye out for the dividend cliff

It is no secret to our Minneapolis readers that this is a Presidential election year, and that the outcome is uncertain. Will deductions change? Will the tax rate change? And what will Congress do? Will we go off the so-called fiscal cliff?

It appears that there may be a dividend cliff as well. Those who want to avoid an IRS audit while still maximizing their tax deductions in 2012 might be keeping a close eye on dividends. Tax planning has seldom been as uncertain as it is this year.

According to financial tax-planning sources, the tax rate on dividends may increase next year. Currently it is 15 percent but it could rise to either 18.8 percent with the addition of a 3.8 percent surtax, or jump to 43.4 percent which would include the 3.8 percent surtax. This could make a significant difference for those with significant dividend income.

Some large companies may assist their shareholders by moving their dividend payout date up a few days to December 31 rather than early January 2013. Walmart has indicated that its January 3 date is not moving. Other companies may move theirs if the past is any indication. Two years ago when there was a similar situation, about two dozen companies moved their dividend distribution date into December for the benefit of their shareholders.

Those with significant dividend income may be more likely to have complex tax scenarios. When faced with complex tax liability or compliance issues, it is a wise decision to seek experienced legal tax advice to maximize liabilities while minimizing audit exposure or compliance problems.

Source: The Wall Street Journal, "Dividends: Start Screaming," Jason Zweig, Oct. 12, 2012

At our Minneapolis law firm we represent clients with the full range of federal and state tax issues including those with tax liability issues, IRS audit controversy or other state or federal income tax issues

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