Capital Corner: D-Day – A Tax Dilemma Looms for Dividends and the Death Tax

Jim Brandenburg, CPA, MST, Shareholder - Tax   email | bio
June 2010

It's hard to believe it's been 66 years since the Allies landed on the beaches of Normandy on June 6, 1944.  D-Day is often seen as the turning point in World War II.  There are fewer and fewer veterans still alive who fought valiantly in this battle.  With June 6th only a few days away it's important to remember that WWII veterans fought for our liberty and, yes, even for the freedom to discuss various political issues, such as tax law changes.  A D-Day of sorts, from a tax standpoint, is approaching soon.  January 1, 2011 will bring several rather significant tax changes.  Below are the D-tails:   

• Dividends - In 2003, the tax treatment on dividends was changed so that the rate on dividends was matched with capital gains and taxed at 15 percent rather than as ordinary income with a maximum rate of 35 percent.  The 15 percent rate for capital gains and dividends is set to expire at the end of 2010.  Capital gains tax rates are scheduled to rise to 20 percent (a 33 percent increase), while the tax rate on dividends, as it stands now, will revert to ordinary income rates, which will be approximately 40 percent in 2011 (a 167 percent increase) unless Congress acts.  While some have proposed matching the dividend rate to the capital gains rate of 20 percent in 2011, a tax law change will be needed, and it is uncertain whether Congress will make this change.
• Death Tax Dilemma - We are now navigating unchartered waters because the estate tax (i.e. death tax) was repealed as of January 1, 2010.  But again, unless Congress acts the estate tax will return on January 1, 2011 at 2001 levels.  It was thought that a new estate tax law would be enacted in 2009 to prevent the dilemma that now exists, but this did not happen.  Now, Congress faces a similar challenge to enact estate tax legislation in 2010.  Leading senators seem to have made progress towards brokering a compromise, but talks recently stalled.  If no compromise estate tax bill surfaces, another option is to use the 2009 estate tax rates and exemptions for several years and also to provide alternative treatments for 2010 estates (since the estate tax technically expired January 1, 2010).    

Look for the D-bate to heat up on these and other tax matters as we move toward another D-Day - Election Day on November 2, 2010.