Capital gain and dividend tax rates were lowered in the 2001 Tax Act and had been extended two more years through December 31, 2010. The rates are 0%, 5%, and 15%, but in 2008 would have gone back up to 20%. The capital gain rates are now are at a maximum of 15%, however if the taxpayer is in an ordinary income tax bracket of 10 or 15 %, the rates on capital gain is only 5% in 2007 and zero for 2008-2010. In essence, this extension of favorable rates matches the remaining tax legislation time-lines and changes from the 2001 Act, that for the most part “sunsets” in 2011, and reverts back to previous tax law.
Dividends are taxed at ordinary income tax rates, however qualified dividend income was included for the same, favorable capital gain rates, with this legislation, until 31 December 2010. In other words, a maximum of 15% on qualified dividends, for some taxpayers only 5% in 2007 and zero in years 2008-2010. This could be important for Corporations, accumulating profits and not paying out enough dividends. There is a penalty tax, equal to 15% (Accumulated Earnings Tax), on Corporations that accumulates earnings and profits to avoid income tax to its shareholders. This tax is in addition to the regular corporate tax. Now, through 2010 would be a good time to consider paying out higher dividend payments to corporate shareholders while this tax is so much lower.