Some of your 2003 capital gains, and many of the dividends you received in 2003, may qualify for new lower tax rates on your 2003 Federal income tax return as a result of law changes that were enacted last year. While this obviously is good news, achieving the lower tax rates is a complicated affair.

New rules for capital gains. If you have a net capital gain (i.e., your net long-term capital gain exceeds your net short-term capital loss), it generally will be more favorably taxed than ordinary income. The rules for determining the maximum tax rate vary depending generally on when the sale occurred. For sales occurring before May 6, 2003, the maximum capital gains rates are 8% (for qualifying property held for more than 5 years), 10%, or 20% depending on your marginal tax bracket. For sales occurring (and installment payments received) after May 5, 2003, the 20% maximum rate on net capital gain is reduced to 15%, the 10% rate is reduced to 5%, and the 8% rate is eliminated. However, regardless of when the sale occurred, some specialized types of gain, such as collectibles gain, is taxed at a maximum rate of 28%, and some gain attributable to real estate depreciation is taxed at a maximum rate of 25%.

New rules for qualified dividends. Your 2003 “qualified dividends” (generally, dividends received from domestic corporations and qualifying foreign corporations) are taxed at the same rate as long-term capital gains, i.e., at 15% (or 5%, to the extent that the dividends would be taxed in the 10% or 15% tax bracket if they were treated as ordinary income). Dividends that aren't qualified dividends are taxed at the same rate as other ordinary income, with a top rate of 35% for 2003. Total ordinary dividends are shown in Box 1a of your Forms 1099-DIV, and qualified dividends generally are shown in Box 1(b) of that form. Note, however, that some dividends may be reported as qualified dividends in Box 1b of Form 1099-DIV but are not qualified dividends. These include:

Dividends you received as a nominee.

Dividends you received on any share of stock that you held for less than 61 days during the 121-day period ( recently changed from 120 ) that began 60 days before the ex-dividend date. The ex-dividend date is the first date following the declaration of a dividend on which the purchaser of a stock is not entitled to receive the next dividend payment. When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it.

Dividends attributable to periods totaling more than 366 days that you received on any share of preferred stock held for less than 91 days during the 181-day period (recently changed from 180 ) that began 90 days before the ex-dividend date.

Preferred dividends attributable to periods totaling less than 367 days are subject to the 61-day holding period rule above.

Dividends on any share of stock to the extent that you are under an obligation (including a short sale) to make related payments with respect to positions in substantially similar or related property.

Payments in lieu of dividends, but only if you know or have reason to know that the payments are not qualified dividends.

CAUTION: Above items designated as recently changed are not reflected in p. 23 of the instructions to Form 1040, line 9b, or in other IRS form instructions and publications. On Feb. 19, 2004, the IRS implemented these changes, which are expected to be passed by Congress as technical corrections to the original legislation, to reduce the burden of requiring taxpayers to file amended returns. While it revised electronic forms and publications to reflect the changes, the IRS will not be resending forms that were already sent to taxpayers. Under the original rule, if you bought stock the day before the ex-dividend date, that dividend would not be a qualified dividend. Now that dividend can be a qualified dividend if you otherwise meet the holding period test. Also, under the original rules, dividends received in 2003 by a partnership, S corporation or estate during a fiscal year that began in 2002 could not be passed through as qualified dividends to the partners, shareholders and beneficiaries. Now they can be under another change that the IRS has implemented. Affected entities will have to file changed forms for their 2002 tax years and supply their partners, S shareholders and beneficiaries with new information. We can help you to determine if you are affected by any of these changes.

Beware of erroneous Forms 1099. It has been reported in the financial press that the new rules on qualified dividends are so complicated that many brokerage firms and mutual fund companies have had a difficult time determining which dividends are eligible to be reported to their customers as qualified dividends and that, as a result, many reporting errors are expected. We can carefully review your Forms 1099s to see if there are any errors or indications of errors and whether you'll need to contact your broker or mutual fund company to request corrected Forms 1099. This will prevent you from losing out on the lower rate or having to file an amended return if nothing is done and the error is spotted later.

Complex computations. The computations needed to take advantage of the new rates for post-May 5, 2003 capital gains and post-2002 qualified dividends are quite complex. Depending on an individual's specific situation, your 2003 capital transactions may be taxed at up to 4 different rates. You may have to file Schedule D and several worksheets or in some cases a single worksheet in lieu of Schedule D. In all cases, you will have to complete several steps to arrive at your correct tax.

Bottom line. In view of all the complicated new rules, the IRS' changes to them, the confusion they have caused for brokers and mutual fund companies, the complexity of completing multiple forms and worksheets and figuring out the amount of tax owed, we strongly urge you to contact your accountant to make certain that he or she is correctly preparing your return with regard to these issues.