With fiscal cliff negotiations still going on, one thing is certain. Tax rates on dividends and capital gains will be going up. The only question is by how much. The highest tax rate on qualified dividends is currently 15%, but in 2013, it could jump to as high as 43.4% for the highest income individuals. As a result, even the most anti-tax advocates are willing to settle for a smaller increase. A 20% tax rate on dividends is starting to look pretty good right now.
Yet 20% is still a third higher than the current rate. This is why, in anticipation of higher rates, many companies are announcing special dividends. Special dividends are dividends in addition to regular dividends. However, unlike regular dividends, special dividends are not recurring. The most recently announced special dividend comes from Costco, which said today that it would dole out $7 per share by year-end to stockholders of record December 10. That’s in addition to the regular quarterly dividend of 27.5 cents per share. This is a huge payout for a company that is expected to earn about $4.50 per share this fiscal year. There is no doubt that Costco is doing what it can to help its shareholders avoid higher expected taxes in the future.
Costco is not the only company to announce a special dividend. Others include Brown-Forman, Las Vegas Sands, Carnival, Tyson Foods, and Movado. Of course, the elephants in the room are Apple and Microsoft. Both companies sit on vast cash hoards and a lot of people are betting that they, too, will announce a special dividend before long. Higher taxes can be avoided as long as these dividends are paid before year-end. Even though they will taxed at just 15%, the payouts will produce windfall revenues for the government this year.