The end for the Bush administration tax cuts is finally near. Those rock-bottom tax rates for long-term capital gains and qualified dividends you've cherished the last few years are set to expire after 2010.
Now is a good time to examine your investment options. Depending on your situation, you may want to push capital gains and dividends into the current year or pull them into succeeding years. Even if tax breaks for capital gains and dividends are resurrected by Congress — by no means a sure thing — it's unlikely that high-income earners will be able to benefit.
Background: Prior to 2003, the maximum tax rate on long-term capital gain was 20%. Dividends were taxed at ordinary income rates reaching as high as 35%.
But a 2003 law lowered the maximum tax rate to 15% for long-term capital gains and "qualified dividends" received through 2008; 5% for taxpayers in the 10% and 15% ordinary income brackets. Furthermore, the 5% rate for lower-income taxpayers was reduced to 0% for 2008. Subsequently, these tax cuts were extended through 2010.
As things stand now, the lower rates will expire on Jan. 1, 2011. At that point, the maximum tax rate for long-term capital gain will revert to 20% for higher-income taxpayers; 10% for taxpayers in the lowest two brackets (currently the 10% and 15% tax brackets, but those rates may be changed, too). Dividends will again be taxed at ordinary income rates. Even worse: For 2011, the top two ordinary income rates of 33% and 35% are scheduled to jump to 36% and 39.6%, respectively. And other tax rate increases could be on the way.
Here are few possible ways you might wring more tax savings from capital gains and dividends.
- Cash in your stock winners before 2011.
- Harvest your stock losers after 2010.
- Roll over or sell qualified small business stock.
- Take dividends in 2010.
- Forgo the installment sale tax break.
We can provide more information about the strategies that are appropriate for
your situation. Call us at 915-857-8158, to schedule a personal meeting.