Understanding Tcja Capital Gains Tax Implications

The Tax Cuts and Jobs Act (TCJA) brought significant changes to capital gains tax implications. The law lowered the top marginal tax rate from 39.6% to 37%.

One key change is the elimination of the deduction for miscellaneous itemized deductions subject to the 2% adjusted gross income limit, including investment fees. This means that investors can no longer deduct investment fees on their tax returns.

The TCJA also limited the exclusion of gain from the sale of a primary residence to $250,000 or $500,000 for married couples filing jointly.

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The TCJA brought about significant changes to how long-term capital gains and qualified dividends are taxed. Prior to the TCJA, individual taxpayers faced three federal income tax rates on these types of income: 0%, 15%, and 20%.

The tax brackets for these rates were tied to the ordinary-income rate brackets. If your long-term capital gains and/or dividends fell within the 10% or 15% ordinary-income brackets, no federal income tax was owed.

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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.

Higher-income individuals with long-term capital gains and dividends were also hit with the 3.8% net investment income tax (NIIT), which increased their tax rate to 18.8% or 23.8%.

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

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For 2018 through 2025, the TCJA stipulates that the trust and estate rates and brackets are also used to calculate the 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.

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The trust and estate brackets for long-term capital gains and qualified dividends are as follows:

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

Short-term capital gains are taxed at the regular ordinary-income rates, which were as follows for 2018.

The maximum long-term capital gains and ordinary income tax rates were equal in 1988 through 1990.

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Paying Taxes on Short-Term Capital Gains is a bit more straightforward - these gains are taxed at the regular ordinary-income rates. For 2018, the ordinary-income rates and brackets are as follows:

The maximum long-term capital gains tax rate is lower than the ordinary-income rates, which is a welcome relief for investors. Since 2003, qualified dividends have also been taxed at the lower rates applied to long-term capital gains.

For trusts and estates, the tax rates and brackets are the same as for long-term capital gains and qualified dividends. This means that the TCJA's brackets for trusts and estates are also used to calculate the kiddie tax when it applies to long-term capital gains and qualified dividends collected by dependent children and young adults.

For more insights, see: Taxes on Dividends and Capital Gains

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

These rates and brackets are 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.

For 2018 through 2025, the TCJA stipulates that these trust and estate rates and brackets are also used to calculate the kiddie tax.

Broaden your view: Taxes on Capital Gains and Dividends

For 2018, short-term capital gains are taxed at the regular ordinary-income rates. The ordinary-income rates and brackets are as follows: 10% for incomes up to $9,525, 12% for incomes between $9,526 and $38,700, 22% for incomes between $38,701 and $82,250, 24% for incomes between $82,251 and $157,500, 32% for incomes between $157,501 and $200,000, 35% for incomes between $200,001 and $500,000, and 37% for incomes over $500,000.

The Tax Cuts and Jobs Act, or TCJA, taxes short-term capital gains just like prior law. This means that short-term capital gains are not taxed at the lower rates applied to long-term capital gains.

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