Client Memo – Likely Tax Law Changes Affects Dividends & Capital Gains

by | Aug 10, 2010 | Client Memo

The Bush tax cuts of 2001 will expire beginning in January 2011.  In addition tax rate reduction acts enacted by Congress in 2003 and 2006 providing tax rate reduction on dividends and capital gains will also expire on December 31, 2010, and the tax rates will revert to 2001 rates unless the provisions are extended or made permanent.  In addition, the recent health care legislation adds a surcharge on investment income beginning in 2013 of 3.8% on income greater than $250,000.  The charts below outline the possible upcoming Federal tax rates and their impact on different investments.  Note that the CA tax rates are not included:

Category 2010 2011 2013 Increase 2010 – 2013
Qualified Dividends 15.0% 39.6% 43.4% 189%
Ordinary Income 35.0% 39.6% 43.4% 24%
Long-Term Capital Gains 15.0% 20.0% 23.8% 59%
Short-Term Capital Gains 35.0% 39.6% 43.4% 24%

How Much Will You Keep?

Category 2010 2011 2013 Increase 2010 – 2013
10-year treasury 2.92% 1.90% 1.76% 1.65%
A Corporate 4.16% 2.70% 2.51% 2.35%
High-Yield Municipal 6.81% 6.81% 6.81% 6.81%

It may make sense to consider increasing income into 2010 if possible at the lower rates, and accelerating long-term capital gains that you might be considering selling to take advantage of the lower rates.

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