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Want to take advantage of the cut in dividend taxes? You'll need to strike while the iron's hot.

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This story appears in the December 2003 issue of Entrepreneur. Subscribe »

If you're a C-corporation owner, there's a short window of opportunity under the Jobs and Growth Tax Relief Reconciliation Act of 2003 you won't want to miss. Here's why: This tax law brightens your dividend picture.

Under the new law, the top rate on dividends is now 15 percent, while the top rate on compensation can run as high as 35 percent. As a result, you may want to shift your compensation strategy and increase dividend payouts while reducing your compensation. While any dividends you receive are free of employment taxes, keep in mind that they are not deductible as a business expense. In the past, given a choice, it made sense to pay compensation rather than dividends. Compensation was deductible by the corporation, thus avoiding one level of tax. Dividends, on the other hand, can generally be paid only out of income that has already been taxed at the corporate level, and are then taxed again when received by the shareholder.

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