REDUCTION IN
CAPITAL GAINS AND DIVIDEND TAXATION
June 2006
The 2003 Tax Act (Jobs and Growth Tax Relief
Reconciliation Act of 2003 - JGTRRA) was signed
into law in May 2003. The capital gains and
dividend taxation provisions of the 2003 Tax Act,
scheduled to expire at the end of 2008, were
extended through 2010 by the 2005 Tax Act (Tax
Increase Prevention and Reconciliation Act - TIPRA).
As is typical of recent tax legislation, the 2003
and 2005 Tax Acts offer tax relief to individuals,
but do so through a variety of complex provisions
that include retroactive, temporary and
phased-in/phased-out effective dates. While some
of these provisions may not apply to you, other
provisions will and you may want to revise your
planning to take full benefit of those
provisions.
Today's topic is the reduction in taxes on capital
gains and dividends. If you would like additional
information on this topic, please call my office.
Reduction in Long-Term Capital Gains Tax Rates
A
capital gain
results when an asset is sold or exchanged for
more than its cost basis. Capital gains realized
on assets held for one year or less are
short-term capital gains
and are taxed at
ordinary income tax rates.
Long-term capital
gains resulting from
the sale or exchange or an asset held more than
one year, however,
receive more favorable tax treatment.
Prior to the passage of the
2003 Tax Act, the maximum long-term capital gains
tax rate was 20% (10% for those in the 10% and 15%
income tax brackets).
The 2003 Tax Act reduced the
maximum long-term capital gains tax rate from 20%
to 15% for capital gains realized on or after May
6, 2003 and through December 31, 2008.
For taxpayers in the 10% and
15% tax brackets, the
long-term capital gains rate was reduced from 10%
to 5% for capital
gains realized on or after May 6, 2003 and through
December 31, 2007, and to zero percent in 2008.
Capital gains taxes were
scheduled to return to the rates in effect prior
to the passage of the 2003 Tax Act in 2009. As
part of the 2005 Tax Act, however, Congress
extended the lower capital
gains tax rates through 2010.
|
For Long-Term Capital
Gains Realized:
|
|
Tax Rates: |
Before 05/06/03
|
After 05/05/03 through
2007
|
2008 through 2010
|
In 2011 and later
|
|
Maximum Tax Rate |
20%
|
15%
|
15%
|
20%
|
|
Tax
Rate (10% and 15% tax brackets) |
10%
|
5%
|
0%
|
10%
|
|
Planning Notes:
1.
The "kiddie tax" requires that the unearned
income, such as dividends and capital gains, of a
child under a specified age be taxed at the
parents' tax rate, which is usually a higher tax
rate. Prior to passage of the 2005 Tax Act, the "kiddie
tax" applied to children under age 14, meaning
that the transfer of appreciated assets to
children age 14 and older (and not subject to the
"kiddie tax") who are in the 10% tax bracket could
result in overall tax savings, since gain on the
child's sale of appreciated assets was taxed at
just 5% (and at 0% in 2008). The 2005 Tax Act,
however, increased the "kiddie tax" age limit to
under age 18 beginning in the 2006 tax year. This
means that families who had planned to sell a
child's college stock portfolio in 2008 in order
to take advantage of the zero capital gains tax
rate cannot benefit from this zero rate unless the
child is at least age 18.
Reduction in Dividend Tax Rates
Prior to the passage of the
2003 Tax Act, dividends were taxed at ordinary
income tax rates. With the passage of the 2003
Tax Act, dividends
paid by a domestic or qualified foreign
corporation to individual shareholders are taxed
at the new lower capital gains tax rates
(15% or 5%). Beginning on January 1, 2009,
dividends were scheduled to again be taxed at
ordinary income tax rates. The 2005 Tax Act,
however, extended use
of the lower capital gains tax rates for dividends
received by individuals through December 31, 2010.
|
For Dividends Received by
Individuals:
|
|
Tax Rates: |
Before 01/01/03
|
After 12/31/02 through
2007
|
2008 through 2010
|
In 2011 and later
|
|
Maximum Tax Rate |
Ordinary income tax rates
|
15%
|
15%
|
Ordinary income tax rates
|
|
Tax
Rate (10% and 15% tax brackets) |
Ordinary income tax rates
|
5%
|
0%
|
Ordinary income tax rates
|
|
Planning Notes:
1.
The individual shareholder must own the
dividend-paying stock for at least 60 days in the
120-day day period surrounding the ex-dividend
date to receive the favorable tax rate.
2.
Generally
speaking, the 15% top rate makes dividend-paying
stocks more attractive from a tax standpoint than
investments that pay out ordinary income, such as
REITs and taxable bonds. Tax treatment, however,
should not be the sole determining factor in
investment selection.
If
you would like additional information on this
topic, please call our office.
