New Rates
While the new law does not eliminate the
double tax on dividends, it does not eliminate the double
tax on dividends, it does provide tax relief to those individual
taxpayers who receive corporate dividends. Under the 2003
Act, dividends are taxable at the same rates as net capital
gains. And the tax rates on those capital gains are going
down- from 20% to 15% and from 10% to 5%.
The capital gains rate cuts are effective
fro tax years ending on or after May 6, 2003, through the
end of 2008. The 5% rate will be 0% in 2008. (In effect,
then, the new capital gains rates will apply to sales and
exchanges and payments received on or after May 6, 2003,
and before January 1, 2009). The holding period to qualify
for the new 15%/5% rates is more than one year. The old
law’s 18%/8% rates are repealed, but return after
2008 for qualifying gains.
The dividend rate cuts are effective for
tax years beginning after 2002 and before 2009. For tax
years beginning after 2008, both dividends and capital gains
will be taxed as they were before the 2003 Act. A transitional
rule applies for capital gains realized before May 6, 2003.
| |
Ordinary Rates on Dividends
and Net Capital Gains* |
| Ordinary Tax Bracket |
2003-2007 |
2008** |
| 10% and 15% |
5%*** |
0% |
| All Others |
15%*** |
15% |
* Exceptions Apply
** After 2008, tax rates revert to pre-2003 Act law.
*** Subject to transition rule for pre-May 6, 2003,
capital gains.
Source: NPI |
Example: Ross, who is in the
highest tax bracket, realizes net long-term capital gain
of $150,000 and qualified dividend income of $50,000 in
2004. Prior to the 2003 Act, Ross would have had to pay
tax on his gain at a 20% rate and on his dividends at a
37.6% rate. Under the new law, both his gain and his dividends
will be taxed at a 15% rate. So, his tax will be approximately
$30,000 on that income instead of approximately $48,800
under prior law.
The new dividend rates apply to dividends
received by an individual shareholder from a domestic or
“qualified foreign” corporation (one whose stock
is traded on an established U.S. securities market or meets
certain criteria).
If a shareholder does not hold a stock
for more than 60 days during the 120-day period beginning
60 days before the stock’s ex-dividend date, dividends
on that stock will not qualify for the reduced rates. Among
the other special rules that apply:
