Thanks to the Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010, investors can rest a little easier. The new law extends favorable tax rates for long-term capital gains and dividends. But the reprieve is only temporary.
For several years, the maximum capital gains tax rate for profits on the sale of securities held longer than a year has been 15% (and there has been no tax on gains for taxpayers in the lowest tax brackets). But that rate had been scheduled to increase to 20% (10% for low-income investors) in 2011. The 2010 Tax Relief Act preserves most existing tax rates, including the lower rate for long-term capital gains, through 2012. That gives you a window for selling assets that have racked up big gains. (You’re allowed to repurchase favorite holdings after a 30-day hiatus.)
Note that even high-income investors may benefit from the 0% rate if a portion of their capital gain income falls below the tax bracket thresholds.
Similarly, the current 15% tax rate for most dividends from U.S. companies is preserved through 2012. Without the new legislation, dividends would have been taxed at ordinary income tax rates that were also scheduled to rise, to as high as 39.6%.
It’s seldom a good idea to let tax considerations dictate investment strategy, but we can help you consider how to make the most of these temporary tax breaks during the next two years.