Low Capital Gains Rates Extended

Taxes on capital gains and dividends have been locked in at their current low rates in the recent tax bill, at least for another two years.

Capital gains on assets held more than one year and dividends received from qualified corporations have been taxed at a maximum rate of 15% since the 2003 tax bill was passed. However, these rates always had an expiration date of 2008. With the recent changes, the rates are good through 2010.

One other interesting provision of the 2003 capital gains rate changes that will soon take effect: a 0% rate on low-income individuals. Between 2008 and 2010, these individuals will be allowed a certain amount of capital gain with no tax whatsoever! A planning opportunity may exist here...giving appreciated assets to your children (18 or over), who may have low enough income to take advantage of the 0% rate.

Kiddie Taxes Increased in New Tax Bill

The 'Kiddie Tax', which taxes children's unearned income over $1,700 at the parents' rate, has been extended to apply to children up to the age of 18. Until 2006, the additional tax only applied through the age of 14.

One consideration of this new law will be educational savings accounts. Custodial accounts (such as UTMA accounts) typically have the child named as the owner, and may result in income being subject to the Kiddie Tax. However, other college savings vehicles such as Section 529 plans are sheltered from current taxation, and may be a better option.

This is one of the provisions of the new tax bill signed in May. We'll provide more details on other facets of the bill over the next few weeks.