Tax planning for investments
It’s definitely tax planning time and this year the Tax Cuts and Jobs Act (TCJA) could create some unintended consequences for taxpayers. For investors, now is a good time to review year-to-date gains and losses to help you determine whether to buy or sell investments before year-end to save taxes. While the TCJA didn’t change long-term capital gains rates, it did change the tax brackets for long-term capital gains and qualified dividends.
For 2018 through 2025, these brackets are no longer linked to the ordinary-income tax brackets for individuals. So, for example, you could be subject to the top long-term capital gains rate even if you aren’t subject to the top ordinary-income tax rate.
For the last several years, individual taxpayers faced three federal income tax rates on long-term capital gains and qualified dividends: 0 percent, 15 percent and 20 percent. 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 percent or 15 percent ordinary-income brackets, no federal income tax was owed. If they fell within the 25 percent, 28 percent, 33 percent, or 35 percent ordinary-income brackets, they were taxed at 15 percent. And, if they fell within the maximum 39.6 percent ordinary-income bracket, they were taxed at the maximum 20 percent rate.
In addition, higher-income individuals with long-term capital gains and dividends were also hit with the 3.8 percent net investment income tax (NIIT). It kicked in when modified adjusted gross income exceeded $200,000 for singles and heads of households and $250,000 for married couples filing jointly. So, many people actually paid 18.8 percent (15 percent + 3.8 percent) or 23.8 percent (20 percent + 3.8 percent) on their long-term capital gains and qualified dividends.
The rules Now
The TCJA retains the 0 percent, 15 percent, and 20 percent rates on long-term capital gains and qualified dividends for individual taxpayers. However, for 2018 through 2025, these rates have their own brackets. Here are the 2018 brackets:
0 percent: $0 – $38,600
15 percent: $38,601 – $425,800
20 percent: $425,801 and up
- Heads of households:
0 percent: $0 – $51,700
15 percent: $51,701 – $452,400
20 percent: $452,401 and up
- Married couples filing jointly:
0 percent: $0 – $77,200
15 percent: $77,201 – $479,000
20 percent: $479,001 and up
For 2018, the top ordinary-income rate of 37 percent, which also applies to short-term capital gains and nonqualified dividends, doesn’t go into effect until income exceeds $500,000 for singles and heads of households or $600,000 for joint filers. (Both the long-term capital gains brackets and the ordinary-income brackets will be indexed for inflation for 2019 through 2025.)
The new tax law also retains the 3.8 percent NIIT and its $200,000 and $250,000 thresholds.
More Thresholds, More Complexity
With more tax rate thresholds to keep in mind, year-end tax planning for investments is especially complicated in 2018. If you have questions, please contact Shlomo Benzaquen, CPA, MBA, Ciuni & Panichi, Inc. Tax Department Senior Accountant at 216-831-7171 or by email here.
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