Lower tax rates boon for many investors

By Deborah Adamson
Advertiser Staff Writer

It's a good time to be an investor: Some of the most common investment gains are being taxed at lower rates.

Long-term capital gains are taxed by the federal government at a maximum of 15 percent, compared with 20 percent before 2003. Qualified dividends are taxed at a maximum of 15 percent instead of your income tax rate, which tends to be higher.

"I think it's ideal," said Dwight Melton, a 45-year-old investor from 'Ewa Beach. "However, as long as I make money, I don't mind paying taxes."

Capital gains or losses are generated when you buy or sell stock, bonds or other securities, whether individually or in a mutual fund. They can be long-term, owned for more than a year before selling, or short-term, owned for a year or less.

Qualified dividends mainly are those from companies, such as Hawaiian Electric Industries, paying out a portion of profits to shareholders.

Don't forget to add broker commissions and fees to the cost of your stock because it would lower your profits, said Marilyn Gagen, a tax accountant and past president of the local chapter of the Financial Planning Association.

But although Uncle Sam gives investors capital gains and dividend tax breaks, Hawai'i hasn't yet followed suit.

Cathleen Tokishi, a tax information specialist at the state Department of Taxation, said Hawai'i still taxes net capital gains at a maximum rate of 7.25 percent. Net capital gains is the profit derived from subtracting short-term capital losses from long-term capital gains.

It's only a 1 percentage point break from the highest state income tax bracket of 8.25 percent. For federal returns, there's a 20 percent difference between the top tax rate and maximum capital gains rate.

Tokishi urges investors to calculate their net capital gains taxes from a worksheet supplied in the tax instruction booklet instead of leaving it lumped together in your taxable income. Otherwise, you'll miss the 1 percentage point tax break.

On the bright side, Hawai'i does not tax interest income from its own municipal bonds and neither does the federal government, Gagen said. But if you own municipal bonds from other states, you will get a pass from Uncle Sam but not from Hawai'i.

One state perk: If you own munis issued by federal territories such as Guam, Puerto Rico or the U.S. Virgin Islands, Hawai'i waives the taxes, as does the federal government, Gagen said.

Interest from U.S. savings bonds also are not taxable by the state, Tokishi said. The federal government generally taxes interest and gains from Treasury and U.S. savings bonds — when you sell or redeem them or when they mature — but there are exceptions, according to the IRS.

Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.