Increased Taxes on Dividend Income and Capital Gains

By Frank Minuti, CPA

Unless Congress passes late year tax legislation to the contrary, the current lower federal tax rates on qualified dividend income and long term capital gains are set to expire at the end of this year.

The current federal income tax rate of 15% on qualified dividend income was put into effect 10 years ago and expires at the end of this year. All dividend income in 2011 and future years will be taxed as ordinary income with a maximum tax rate for 2011 of 39.6%.

Owners of corporations that have sizeable retained earnings may want to consider the payment of dividends by the end of this year to take advantage of the lower 15% tax rate.

The maximum federal tax rate on gains/profits on the sale of capital assets such as stocks and real estate held for more than 1 year is 15% through the end of 2010. Starting in 2011 the maximum rate will increase to 20% for assets held over 1 year but less than 5 years and 18% for assets held more than 5 years. (Note that for gain on depreciable real estate, any gain attributable to depreciation already taken will be taxed at 25%.)

In light of these changes, taxpayers should consult with their tax advisors to determine how these changes will affect them and plan their best course of action.