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Long-Term Capital Gain and Qualified Dividend Tax Rates [IRC §1(h)]

21 January

Long-term capital gains are gains on capital assets held for more than one year. Qualified dividends are ordinary dividends from domestic C corporations that meet certain holding period rules and other requirements that qualify for long-term capital gain tax rates.

Under The Jobs and Growth Tax Relief Reconciliation Act of 2003, the maximum tax rates on long-term capital gains were reduced from 20% to 15% for gains realized after May 5, 2003. The maximum tax rates on qualified dividends were reduced from the top ordinary tax rate to 15% for tax years after 2002. These tax rate reductions were subject to a sunset provision so that the tax rates for 2013 would return to the tax rates that applied prior to 2003.

New Law: The new law repeals the sunset provision in the 2003 tax act and adds a new 20% rate for taxpayers in the top 39.6% tax bracket (those above $400,000 Single, $425,000 HOH, $450,000 MFJ and QW, and $225,000 MFS, adjusted annually for inflation). Thus, for taxpayers below the top 39.6% tax bracket, the reduced tax rates on long-term capital gains and qualified dividends is permanently extended. The following chart illustrates the applicable tax rates under the new law.

HOH=head of household    MFJ=married filing jointly    QF=qualified widow/widower

 

Long-term capital gain maximum tax rates:

For taxpayers with ordinary tax rates of:
Before 5/6/2003
After 5/5/2003 to 2007
2008 to 2012
2013 and after
Top rate (39.6% after 2012) 18% or 20% 15% 15% 20%
25% to rate below top rate 18% or 20% 15% 15% 15%
10% or 15% 8% or 10% 5% 0% 0%

Note: The 8% and 18% rates prior to May 6, 2003 applied to qualified 5-year gain property.

 

Qualified dividend income tax rates:

For taxpayers with ordinary tax rates of:
Before 1/1/2003
After 12/31/2002 to 2007
2008 to 2012
2013 and after
Top rate (39.6% after 2012) Ordinary rate 15% 15% 20%
25% to rate below top rate Ordinary rate 15% 15% 15%
10% or 15% Ordinary rate 5% 0% 0%

 

Special tax rates for certain gains. The 25% maximum tax rate on unrecaptured section 1250 gain, and the 28% maximum tax rate on gains from collectibles still apply. Those rates are permanently extended under the repeal of the 2003 tax act sunset provisions. Ordinary dividends that are not qualified dividends and short-term capital gains continue to be taxed at ordinary tax rates.

Disclaimer: Electrical Distributor Consulting is not a law firm, CPA, or affiliated with the IRS. We are Electrical Distributors sharing our knowledge and experience to help improve distributors looking to go to the next step. Please seek the advice of your local professional to see how these tax code changes may affect you.

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