Dividends and Interest- What's New !
The law provides a break on dividends and capital gains: Forget about tax-free dividends. Much as many folks liked the concept, it was never going to happen politically. Instead, the new plan reduces the tax on capital gains and dividends together.
Right now, dividends are taxed at your ordinary income rate. For most taxpayers, long-term capital gains are taxed at 20 percent.
Except for lower-income taxpayers, the rates for both long-term capital gains and dividends are reduced to 15 percent. The new rates apply to capital gains realized and dividends received on or after May 6, 2003.
(There's no change for short-term capital gains, which are taxed as ordinary income for all taxpayers.) If you are in the lower income brackets of 10 percent and 15 percent, your long-term capital-gains rate is 10 percent. The new plan will change the tax on capital gains and on dividends to 5percent.
In 2009, those tax rates revert to current levels ! This needs to be taken into account in your long term planning !
Miscellaneous provisions relating to investments and income
Ouch ! I would prefer my kids to be left alone. If you have shifted income in this method check with us at Tax Planning . This section toughens the kiddie tax provision: Under current law, parents can invest money for their children, but that income is subject to the parents' tax rate until the child turns 14. After that, the investments are taxed at the child's tax rate, which typically is much lower. The new plan raises the age to 18.
--For converting rentals, makes the holding period longer: In this hot, hot real estate market, it's not uncommon for folks who have rentals to sell them for a tidy profit. Under current law, owners who are renting out property must make that property their home for two years if they want to sell and get a $500,000 exemption on capital gains.
--Under the new plan, you'll have to live in that property for five years if you want your gains to be tax-free.
Final item- Some very good things for homeowners !
--Provides a new write-off for homebuyers: If you're a homebuyer who can't come up with that 20 percent down to get out of private mortgage insurance, you're getting a break under this plan. That PMI payment (usually 1 percent of your monthly mortgage payment) will be deductible. Ditto for FHA premiums, usually about a half-percent of monthly mortgage payments.