Professional Documents
Culture Documents
Payout Policy
Learning Goals
The Jobs and Growth Tax Relief Reconciliation Act of 2003 significantly
changed the tax treatment of corporate dividends for most taxpayers.
– The act reduced the tax rate on corporate dividends for most
taxpayers to the tax rate applicable to capital gains, which is a
maximum rate of 5 percent to 15 percent, depending on the
taxpayer’s tax bracket.
– This change significantly diminishes the degree of “double
taxation” of dividends, which results when the corporation is first
taxed on its income and then when the investor who receives the
dividend is also taxed on it.
– After-tax cash flow to dividend recipients is much greater at the
lower applicable tax rate; the result is noticeably higher dividend
payouts by corporations today than prior to passage of the 2003
legislation.
– The American Taxpayer Relief Act of 2012, extended the 15%
rate on capital gains and dividends for taxpayers in all but the
highest tax bracket.
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Focus on Practice
Capital Gains and Dividend Tax Treatment Extended to
2012 and Beyond for Some
– Prior to 2003, dividends were taxed once as part of corporate
earnings, and again as the personal income of the investor, in
both cases with a potential top rate of 35%. The result was an
effective tax rate of 57.75% on some dividends.
– Though the 2003 tax law did not completely eliminate the double
taxation of dividends, it reduced the maximum possible effect of
the double taxation of dividends to 44.75%. For taxpayers in the
lower tax brackets, the combined effect was a maximum of
38.25%.
– The American Taxpayer Relief Act of 2012 extended the 15% rate
for taxpayers in the 25, 28, 33, and 35% income tax brackets.
However, individuals making more than $400,000 and couples
earning more than $450,000 will now pay 20% on capital gain
and dividends.
How might the expected future reappearance of higher tax rates on
individuals receiving dividends affect corporate dividend payout
policies?
• Chapter Cases
• Group Exercises
• Critical Thinking Problems
The corporate
treasurer, Margaret
Jennings, has been
presented with
several competing
investment
opportunities by
division and product
managers. However,
funds are limited
and Jennings must
choose among the
investments.