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What The Tax Act Means To Investors


The long-awaited Tax Relief Act of 2010—signed on December 17, 2010—extends favorable tax treatment for long-term capital gains and qualified dividends. In addition, the new tax act improves a tax exclusion for investments in “qualified small business stock” (QSBS). Investors may be buoyed by the eleventh-hour changes.
      But the good news is fleeting. If Congress doesn’t act again, these tax breaks are scheduled to “sunset” after 2012. So investors could wind up facing uncertainty again in just two years. Here are the key points.
      Capital gains and dividends.Under the tax cuts enacted in 2003 and subsequently extended through 2010, the maximum tax rate for long-term capital gains was reduced from 20% to 15%. What’s more, the maximum 5% rate for long-term gains for low-income investors in the 10% and 15% income tax brackets for ordinary income was cut to 0% from 2008 through 2010. (These favorable rates apply to sales of securities and other capital assets held longer than one year. Short-term capital gains are taxed at ordinary income rates.)
      Now, with those rates extended through 2012, investors have two more years to reap the rewards of low-tax-cost securities sales. Even if you’re in an income tax bracket of 25% or higher, a portion of your capital gains may qualify for the 0% rate.
      Similarly, qualified dividends had been taxed at a maximum 15% tax rate or 5% for lower-income investors (reduced to 0% for 2008 through 2010). To qualify, the stocks paying the dividends must be held for at least 61 days during a 121-day period. These tax breaks for dividends are also preserved through 2012. Without the extension, dividends would have been taxed at ordinary income rates after 2010.
      Qualified small business stock.Under earlier rules, investors could exclude tax on up to 50% of the gain from the sale of QSBS if certain conditions were met. For example, the stock had to have been held at least five years before it was sold. And under a special rule, the maximum tax rate on the taxable portion of QSBS was 28%.
      The maximum tax exclusion was then increased to 75% for QSBS acquired after February 17, 2008 and before January 1, 2010. Then Congress hiked the maximum exclusion to 100% for QSBS acquired after September 27, 2010 and before January 1, 2011. Now, the 2010 Tax Relief Act extends the 100% exclusion through December 31, 2011.
    That means you can invest in a qualified small business this year—or put more cash into your own qualified small business—and sell the stock owing no taxes after five years. You could also roll over the stock tax-free into other QSBS.
Of course, tax breaks by themselves shouldn’t dictate investment decisions. But they’re a nice plus for moves that make sense in your portfolio.

This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.

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