Wednesday, September 1, 2010

Update on U.S. Long-Term Capital Gain, Interest and Dividend Tax Rates

Long-term capital gains and qualified dividends are currently taxed at a maximum rate of 15 percent, and ordinary income (including interest and non-qualified dividends) is currently taxed at a maximum marginal rate of 35 percent. These rates (which were part of the so-called “Bush tax cuts”) are scheduled to expire on December 31, 2010. Various legislative proposals would extend the Bush tax cuts in whole or in part, but it is unclear whether Congress will act before year end and, if it does, what changes will result. Without Congressional action, in 2011 the highest rate on long-term capital gains will rise to 20 percent and the highest marginal rate on ordinary income, including interest and all dividends, will rise to 39.6 percent.

In addition, on March 30, 2010, President Obama signed into law the Health Care and Education Reconciliation Act of 2010 (the “HCERA”). The HCERA imposes a 3.8 percent surtax on unearned income (including capital gains, interest and dividends). The surtax is effective January 1, 2013.

The chart below illustrates the 2011-2013 highest marginal tax rates, assuming that the Bush tax cuts are not extended.

2010 2011 2012 2013
Ordinary Unearned Income (e.g., interest and non-qualified dividends)  35% 39.6% 39.6% 43.4%
Qualified Dividends 15% 39.6% 39.6% 43.4%
Long Term Capital Gains 15% 20% 20% 23.8%