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Capital Gains Rates Before and After the New Tax Law

Capital Gains Rates Before and After the New Tax Law

Posted on May 4th, 2018

Are you confused about the federal income tax rates on capital gains and dividends under the Tax Cuts and Jobs Act (TCJA)? If so, you’re not alone. Here’s what you should know if you plan to sell long-term investments or expect to receive dividend payments from your investments.

Old Rules

Prior to the TCJA, individual taxpayers faced three federal income tax rates on long-term capital gains and qualified dividends: 0%, 15% and 20%. The rate brackets were tied to the ordinary-income rate brackets.

Specifically, if the long-term capital gains and/or dividends fell within the 10% or 15% ordinary-income brackets, no federal income tax was owed. If they fell within the 25%, 28%, 33% or 35% ordinary-income brackets, they were taxed at 15%. And, if they fell within the maximum 39.6% ordinary-income bracket, they were taxed at the maximum 20% rate.

In addition, higher-income individuals with long-term capital gains and dividends were also hit with the 3.8% net investment income tax (NIIT). So, many people actually paid 18.8% (15% + 3.8% for the NIIT) or 23.8% (20% + 3.8% for the NIIT) on their long-term capital gains and dividends.

New Rules

The TCJA retains the 0%, 15% and 20% rates on long-term capital gains and qualified dividends for individual taxpayers. However, for 2018 through 2025, these rates have their own brackets that are not tied to the ordinary-income brackets. Here are the 2018 brackets for long-term capital gains and qualified dividends:

Tax Rates Single Married Joint Filers Head of Household
0% $0 – $38,600 $0 – $77,200 $0 – $51,700
15% $38,601 – $425,800 $77,201 – $479,000 $51,701 – $452,400
20% $425,801 and up $479,001 and up $452,401 and up

After 2018, these brackets will be indexed for inflation.

The new tax law also retains the 3.8% NIIT. So, for 2018 through 2025, the tax rates for higher-income people who recognize long-term capital gains and dividends will actually be 18.8% (15% + 3.8% for the NIIT) or 23.8% (20% + 3.8% for the NIIT).

Rates for Trusts and Estates

For 2018, the brackets for trusts and estates that collect long-term capital gains and qualified dividends are as follows:

Tax Rate Long-term capital gains and qualified dividends
0% $0 – $2,600
15% $2,601 – $12,700
20% $12,701 and up

For 2018 through 2025, the TCJA stipulates that these trust and estate rates and brackets are also used to calculate the so-called “kiddie tax” when it applies to long-term capital gains and qualified dividends collected by dependent children and young adults. The kiddie tax can potentially apply until the year that a dependent young adult turns age 24. (Under prior law, the kiddie tax was calculated using the marginal rates paid by the parents of affected children and young adults.)

Got Questions?

In a nutshell, the new law keeps the same tax rates for long-term capital gains and qualified dividends, but the rate brackets are no longer tied to the ordinary-income tax brackets for individuals. If you have questions or want more information about how long-term capital gains and qualified dividends are taxed under the TCJA, contact BHCB.

 

Dear Clients, Business Associates and Friends,

As the coronavirus (COVID-19) continues to affect local communities and global economies, you may have concerns about your financial well-being as well as your business and employees. Or you may be wondering about how recently passed legislation impacts you and your enterprise.

BHCB is still at work, continuing to service the needs of our clients.

Whether you have tax or financial planning questions or need advice on ways to navigate the expanded benefits, we are here for you. If you have any questions or concerns, please do not hesitate to contact us at our respective offices. New Haven – 203-787-6527, Fairfield – 203-333-2228.

During this unpredictable and challenging time, it’s more important than ever to stay connected. We are in this together and our thoughts go out to all who have been impacted by this unprecedented situation.

Rest assured; we are here to help with your questions.

We have also assembled a list of resources to help individuals and businesses through this period.