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TAX FACTS: New Law gives mixed Tax Results for Capital Gains and Dividends

Tom Ploskanka, CPA

Courtesy of Tom Ploskanaka—

The new tax law passed as the country teetered on the edge of the fiscal cliff – the American Taxpayer Relief Act of 2012 (ATRA) – generally extends favorable tax rates for capital gains and dividends. But the news isn’t good for all taxpayers. Some upper-income investors will have to pay a higher tax than other individuals.

Background: Under prior law, investors were taxed at a maximum 15% rate on long-term capital gains and qualified dividends, reduced to 0% for taxpayers in the two lowest 10% and 15% ordinary income tax brackets. These tax breaks, which had been extended several times, were set to “sunset” after 2012. At that point, the maximum tax rate for long-term capital gains would have increased to 20%, or 10% for the lower-income taxpayers, while qualified dividends would have been taxed at ordinary income rates as high as 39.6%.

Now ATRA permanently preserves the lower maximum rates for most investors. However, for single filers with taxable income above $400,000 and joint filers with taxable income above $450,000, the maximum rate for long-term gains and qualified dividends jumps to 20%, beginning in 2013.

The other tax rules for capital gains and dividends continue to apply. For instance, you must hold assets for longer than one year to qualify for a long-term gain on a sale, while capital gains and losses are still “netted” at the end of the year. The definition of “qualified dividends” still covers most dividends paid by domestic corporations when you’ve held the stock more than 60 days during the 121-day period beginning 60 days before the ex-dividend date.

Summary: Another key tax factor might influence upper-income investors in 2013. A new 3.8% Medicare surtax may apply to a portion of net investment income. Consider all the tax implications as you make investment decisions this year.

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