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Economy & Business

More Companies Announce Special Dividends to Avoid Tax Hike

Walt Disney Corporation, Wal-Mart, Dish Network, and now Pittsburgh-based American Eagle Outfitters are just some of the many companies that have announced they are moving up their dividend payments.

American Eagle announced today they are moving up the payment of its first quarter dividend from April to December 28th.

Brian Koble, director of research at Hefren-Tillotson, an investment advisory and financial planning firm based in Pittsburgh, said companies are trying to take advantage of lower taxes on dividend payments this year.

“Today dividends are taxed at 15 percent,” said Koble. “That rate could more than double after the new year unless Washington intervenes.”

That tax rate is a part of the Bush era tax cuts that are set to expire at the end of the year, part of the “fiscal cliff.”  Under the 2003 cuts, the top tax rate on dividends decreased from 38.6 percent to 15 percent.

Koble said offering the special dividends gives a tax advantage to shareholders, who would possibly be paying 38.6 percent of their dividend earnings if they received them after the New Year.

He  said most companies offering the dividends have a lot of money on their balance sheets and few places within the company to invest.

Koble said not everyone would see a noticeable difference in individual tax savings.

“I think the folks that benefit the most would be folks who have substantial holdings in some of these stocks that are paying a special dividend,” said Koble. “For the average person with a diversified portfolio the effect will likely be quite modest.”

Koble said the last time there was a spike in special dividends was in 2010, when there were rumors that Congress might let the Bush tax cuts expire.

According to Markit, a financial information service, the 2010 rumors encouraged 50 companies to give special dividend payments, up from 31 normally.

Markit expects this year’s special dividends to match or exceed 2010 levels, while Koble said as many as four times the number of companies could announce special dividends compared to 2011.