The New Tax Law: Taxes on Investment Income
February 13 2018 - 01:06PM
Dow Jones News
By Laura Saunders
The tax overhaul doesn't change the favorable rates for
long-term capital gains and many dividends, and a popular zero tax
rate on these types of investment income will continue to
exist.
In 2018, the zero rate will apply to married couples, filing
jointly, that have up to $77,200 of taxable income ($38,600 for
singles). A 15% rate then takes effect for joint filers with up to
$479,000 of taxable income ($425,800 for singles), and a 20% rate
applies above that. These rates and brackets are similar to those
in effect for 2017.
Long-term capital gains are net profits on investments held
longer than a year. As in prior law, short-term capital gains on
investments held a year or less are taxed at the same rates as
ordinary income.
The favorable rate for dividends applies to those that are
"qualified," which most are. Nonqualified dividends are taxed at
ordinary-income rates.
-- How the zero rate applies: Some readers have asked how the
zero rate on investment income applies. Here is a simplified
example:
Say that Herbert is a single taxpayer with $30,000 of taxable
ordinary income after deductions and exemptions, such as for
tax-free municipal-bond interest or the sale of a home. This income
is taxed at regular rates up to 12%, as detailed in the new tax
brackets.
But Herbert also has a $20,000 long-term capital gain. This
$20,000 "stacks" on top of his $30,000 of other income. As a
result, he would owe zero tax on $8,600 of his gain and 15% on the
remaining $11,400.
-- Surtax is left in place: Many readers have also asked whether
Congress repealed the 3.8% surtax on net investment income. It did
not. This levy takes effect at $250,000 of adjusted gross income
for most married couples and $200,000 for most single filers.
As a result, top-bracket taxpayers typically owe 23.8% instead
of 20% on their long-term gains and dividends. Some investors in
the 15% bracket owe the 3.8% surtax because their adjusted gross
income is above the $250,000/$200,000 thresholds, while others
don't because their income is lower.
-- No FIFO rule change: Lawmakers also didn't enact a proposed
provision for individual investors known as FIFO, for "first-in,
first-out." This change would have forced investors selling part of
a holding in a taxable account -- as opposed to a retirement
account -- to sell their oldest shares first, raising taxes in many
cases.
Congress also preserved most tax exemptions for municipal-bond
interest.
Write to laura.saunders@wsj.com
(END) Dow Jones Newswires
February 13, 2018 12:51 ET (17:51 GMT)
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