One of the biggest changes in the new law was to reduce the tax
on both dividends and capital gains. Let’s look at the changes in
more detail.
One of the biggest changes in the new law was to reduce the tax on both dividends and capital gains. Let’s look at the changes in more detail.
Dividends
If you’re in the top four tax brackets, you’ll pay 15 percent tax on most dividend income received through 2008.
Until now, dividends have been taxed as ordinary income, at rates as high as 38.6 percent. If you’re in the 10 or 15 percent regular income tax brackets, you’ll pay five percent tax on dividend income through 2007 and zero in 2008.
These new rates are retroactive for dividends received since January 1, 2003.
Capital Gains
The same new rates will apply to most long-term capital gains realized through 2008. The 15 percent capital gains rate for those in the top four brackets is down from 20 percent under the old law.
If you’re in the lower two brackets, your rate drops from the current 10 to five percent through 2007 and to zero in 2008. These new rates apply to most long-term capital gains realized on or after May 6, 2003.
Even if you have only short-term capital gains, you’ll probably still see some tax savings.
That’s because short-term gains are taxed as ordinary income, and the new law reduces ordinary income rates for many taxpayers.
It’s too early to see how corporations and the stock market will react to these new rules. But the changes offer significant tax-saving opportunities. For example, shifting investment assets to someone in the lower tax brackets could be an attractive strategy.
You should assess the impact of these latest tax law changes on your personal tax situation. Then review your investment strategies to maximize your tax savings.
Kris Nolan is a CPA with the accounting and business consulting firm of Bianchi, Lorincz and Company in Morgan Hill.
