The Treasury Department on Friday clarified the effective dates for the investment tax cuts voted on by Congress this week.
The drop in the maximum tax rate on dividend income, from 38.6% to 15%, will cover any qualified dividends earned since Jan. 1.
However, the lower tax rate on long-term capital gains -- which will be 15%, down from 20% -- will apply to gains realized on or after May 6, the Treasury said.
Gains realized before May 6 will be subject to the previous tax rates.
That presumably will create more tax-reporting complications for investors and financial services firms such as mutual funds when 2003 tax returns are filed next year, because gains realized in 2003 will have to be segregated as either pre- or post-May 6.
Tax advisors were giving clients other details of the legislation, which the Senate approved on Friday and sent to President Bush. For example:
* To qualify for the reduced tax rate on a dividend payment, an investor must hold the stock for more than 60 days, said Robert Willens, tax expert at brokerage Lehman Bros. in New York.
* Dividends paid by a foreign company will be eligible for the lower tax rates as long as the company’s stock trades on a U.S. exchange.