Cuts Here Today Gone Tomorrow

June 13, 2003
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GRAND RAPIDS — The $350 billion tax cut affects dividends and some long-term capital gains. But these will be gone in five years unless Congress decides to extend the cuts.

Dividends

Through the end of 2008, dividends will be taxed at the same rate as long-term capital gains. That means the maximum rate on qualified dividends is now only 15 percent instead of an investor’s ordinary income rate, which could be as high as 35 percent.

The rate is even lower for investors in the 10 percent to 15 percent tax brackets.

For them, dividends will be taxed at only 5 percent. Singles who have taxable income of $28,400 or less, and marrieds with taxable incomes of $56,800 or less, fall into these brackets. In 2008, and just for that year, their dividend rate will be 0 percent.

An investor has to hold stock for more than 60 days during the 120-day period that begins 60 days before the last date that shareholders of record are entitled to receive an upcoming dividend. Otherwise, the dividend will be taxed at an investor’s ordinary rate.

Capital Gains

Long-term capital gains from sales will be taxed at no more than 15 percent, down from 20 percent, and at only 5 percent for investors in the 10 percent and 15 percent tax brackets. Like the rates on dividends, these lower-income earners won’t pay any tax on capital gains in 2008 and only for that year.

But, unlike dividends, there are a few exceptions to capital gain rates.

A 25-percent maximum rate still applies to long-term real-estate gains from depreciation deductions claimed against a property. A 28-percent maximum remains in place for certain small-business stock and collectibles. And ordinary income rates apply to gains from tax-deferred retirement accounts.

Result

Here is an example of what these cuts mean. A married couple with $50,000 a year in taxable income last year would have paid $200 in capital gains taxes on a $1,000 stock sale profit and another $270 on $1,000 in dividend income. Under the new law, the tax on the dividend income would be $50 and the tax on the gain would be $50 for a tax total of $100, according to information from moneycentral.msn.com and smartmoney.com.

The total tax savings amounts to $370.  

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