New rules change the rates you'll pay on capital gains, dividends

Ninth in a series

Tax Tips

Your Money

March 28, 2004|By Lorene Yue

If you had any capital gains or dividends in 2003, you'll want to pay close attention to your broker statements, thanks to a tricky set of new rules.

Capital gains for stocks held more than one year will be taxed at two different maximum rates: 20 percent for sales before May 6, 2003, and 15 percent for sales on or after that date. And for taxpayers in the lowest brackets - 10 percent or 15 percent - the tax rate on long-term capital gains drops to 5 percent.

You will need to check your records for when you bought and sold a stock because broker statements won't tell you how long you held it, which you need to know to determine whether you qualify for the new capital gains rate.

Qualified dividends paid in 2003 are being taxed at a new, lower rate. Instead of being taxed at your individual rate, qualified dividends in 2003 are taxed at a maximum of 15 percent. The rate for qualified dividends drops to 5 percent if you fall in the 10 percent or 15 percent tax bracket. But there's a complicated holding requirement to qualify for the new rate. Your 1099-DIV statements should detail which dividends qualify for the new tax rate, but they could be wrong.

Reporting mistakes are bound to happen, so compare your statement with your own records and straighten out discrepancies as soon as possible. If you wait too long, your brokerage firm could be overwhelmed with requests, leaving you stuck.

And don't be surprised if you receive a corrected 1099-DIV. Errors are popping up with a number of brokerage firms' reporting systems. Some firms have said that they are sending out more corrected 1099-DIVs than last year.

Next week: Tax breaks for older filers

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