Given sizable tax increases on dividends and capital gains starting in 2011, you may want to schedule an appointment with your tax adviser extra early this year. Taking action now is especially important if you have a C corporation that's been accumulating dividends instead of paying them, DTN Tax Columnist Andy Biebl emphasized in his "Ask the Taxman" article this week.

Dividends have enjoyed a 15 percent tax rate--the same as capital gains--for much of the past decade. But tax advisers and politicians are awaiting recommendations from President Obama’s tax reform panel, which is scheduled to issue its report after the November elections. Biebl expects "the tax increases will then be enacted very late in 2010, leaving little time before December 31 to accomplish transactions at today’s lower rates, and of course too late to affect voting." However, he expects the rates on dividends to jump from 15 percent to 20 percent, or possibly higher.

One reason for special concern is that if Congress does nothing, dividends are slated to be taxed like ordinary income, with rates up to 39.6 percent, other CPAs point out. That could mean a possible 164 percent increase in taxes at the upper brackets. "In fact, if there's any way you can pay dividends now instead of 2011 or later, you should," says Clinton Baker, a CPA with Kennedy and Coe in Wichita, Kan.

Baker points out that Congress authorized another 3.8 percent tax on "unearned income" as part of the funds to pay for health care reform starting in 2013. That would make the top rate at least 23.8 percent for dividends for couples making $250,000 or more ($200,000 for singles). In a worst case scenario, dividends could be taxed as high as 43.4 percent in 2013, Baker says.

As far as tax hikes go, this one is "real stiff," Baker says.

These new surcharges will also add to tax burdens for those who anticipate paying capital gains on raised livestock or farmland.

"This is the first time in at least 20 years that we are counseling our clients to consider paying a tax now rather than later," Baker says. "The normal advice is to defer income, but in this case we know that will cost you x percent more in the future."

© Copyright 2010 DTN/The Progressive Farmer, A Telvent Brand. All rights reserved.