Entrepreneurs who decided to start a corporation underneath the Bush administration's tax cuts were subject to no more than a 15 percent income tax on dividends earned from company stock. After this year, the maximum federal tax rate could increase greatly. Bill Bischoff of Entrepreneur magazine offers advice on how stockholders in successful C-corporations can make the most of their stock before the possible change.
If no further changes are made, at the end of this year, the 2001 tax cuts expire, and Congress must decide on the new tax structure. Without the tax cuts in effect, the government will be able to tax up to 39.6 percent of dividends. Investors could pay $35 billion more, according to the Christian Science Monitor.
In order to avoid a larger tax hit in the future, Bischoff recommends that company stockholders consider taking dividends in 2010, when taxes are still capped at 15 percent.
Other options include selling back some stock to the company or selling stock this year for cash. President Barack Obama wants to limit the maximum federal rate to 20 percent, a decision which is ultimately in the hands of Congress. This leaves the current 15 percent rate as a window for minimal tax deductions.