What is the Higher Capital Gains Tax?

Today, if you happen to be in the 25% or higher tax brackets, your effective tax rate for capital gains and qualified dividends is 15%.  If you’re in a bracket lower than the 25% bracket (10% or 15%), you pay a 0% (yes, that’s right, ZERO, ZILCH, NADA) rate on your capital gains and qualified dividends.  That’s all set to change in 2011, unless Congress makes some changes to the code.

Capital Gains and Qualified Dividends Rates in 2011

If you’re in the 25% bracket or higher in 2011 (and beyond), your capital gains will be taxed at 20% – or a special 18% rate for qualified 5-year gain property.  Your qualified dividends are where you really get spanked, though:  these will be taxed at your ordinary income tax rate… the same as if they were earned income.  So if you’re in the brand-new 39.6% category, your qualified dividends will experience a 264% increase in effective rate – from 15% in 2010 to 39.6% in 2011!

If your tax bracket is below the 25% level, you’ll pay a 10% rate on your capital gains (8% special rate on qualified 5-year gain property), and ordinary income tax rates on qualified dividends.

This change alone represents a major increase in taxes – which I’ll find it very hard to believe that Congress will not take full advantage of.  And no new law has to be passed, nothing voted on… we’re just going to get another opportunity to help bail out our country.  Yippy.

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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