IRS Issues Guidance On Capital Gain Dividends
The lower rates are currently only legislated through 2008. The maximum tax rate on net capital gain has been reduced to 15 percent from 20 percent for most tax payers, and reduced to five percent from 10 percent for taxpayers in the 10 percent and 15 percent tax brackets for property sold or otherwise disposed of after May 5, 2003. The reduced rate applies for both the regular tax and the alternative minimum tax.
"Last year the President's Jobs and Growth Tax Relief Reconciliation Act of 2003 lowered the capital gains rates on dividends," said Acting Assistant secretary for Tax policy Greg Jenner. "These lower rates mean taxpayers will have more money to invest, save for their children's education or buy a home”
Mutual funds with net capital gains may designate some of their dividends as "capital gain dividends," which are taxed to the fund's shareholders like long term capital gains. Since 1997, mutual funds' designations of capital gain dividends have included an additional designation of which rate applies to the dividend because long term capital gains from different sources have been taxed at different tax rates.
Concern had been expressed that the existing rules for dividend designation and the transition to the new, lower capital gain rates enacted last year might cause some 2004 capital gain dividends to be taxed to fund shareholders at the old, higher capital gain rates. The guidance issued today clarifies that this will not occur.