An Overview of the Expiring Tax Provisions

2010 Tax Rates

Investors currently are taxed at a maximum tax rate of 15 percent on long-term capital gains and “qualified” dividends.[1] For investors in the two lowest (10 and 15 percent) tax brackets, long-term capital gains and “qualified” dividends currently are exempt from tax.

Scheduled Expiration of these Tax Rates

These lower tax rates, which became effective in 2003 and were extended in 2006, are scheduled to expire at the end of 2010.

Tax Rates in 2011 if Current Law (2010) Rates Are Not Extended

Unless Congress acts to extend the current law treatment of these types of investment income, the tax rates will revert to those in place prior to the 2003 law changes. Thus, taxpayers in the two lowest brackets will pay tax on long-term capital gains at a 10 percent rate (up from 0 percent), while taxpayers in other brackets will face a 20 percent rate (up from 15 percent) on such gains. Other investment income (including previously “qualified” dividends) would be taxed as ordinary income at each investor’s “regular” tax rate —15 percent to 39.6 percent in 2011, unless changes to these rates are enacted in the future.

Endnotes

[1] Long-term capital gains are gains on assets held for more than one year. Qualified dividends include dividends from U.S. corporations and certain foreign corporations, so long as the investor holds the stock for a specified time period, generally 61 days.