Tax Tip of the Week
For the week of January 26, 2004

Know how your investment income is taxed

The tax rates on some kinds of investment income changed drastically last year. Whether you're dealing with last year's taxes or planning for this year, you need to know how your investment income is taxed. Here's a quick review.

Dividends
Dividends used to be taxed as ordinary income at rates as high as 38.6%. But from January 1, 2003, the tax rate on "qualified" dividends dropped to 15% for most taxpayers, or to 5% for those in the lower two tax brackets. Not all dividends are "qualified." Generally, qualified dividends are those paid by stocks or stock mutual funds. Dividends you earn on money market funds or bond funds may still be taxed at ordinary income rates. The Form 1099 you receive from your broker will show which dividends qualify for the lower rates.

Capital Gains
Long-term capital gains also enjoy new lower rates. Generally, you'll pay 15% on long-term gains realized after May 5, 2003, or 5% if you're in the lower two tax brackets. There are exceptions, though. You'll pay higher rates on gains from collectibles, small business stock, and certain real estate sales.

Remember that long-term gains come from assets held for more than 12 months. Tax on short-term gains is at ordinary income rates, now as high as 35%.

Interest
The interest you earn on bank savings, CDs, and most bonds still counts as ordinary income. Interest on state and municipal bonds is generally free of federal taxes, and you can defer interest on U.S. savings bonds until the bonds mature.

The new lower tax rates make good planning even more important. Contact our office for more information on minimizing taxes on your investments.

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