Does the TCJA Change the Rules for Capital Gains and Dividends?
posted Dec 7, 2018 by Paul Nadeau Jr., CPA, MST in the Global Tax Blog
For 2018 through 2025, the tax brackets on long-term capital gains and qualified dividends won’t be tied to the ordinary-income tax brackets. This change is part of the sweeping tax reform legislation (the Tax Cuts and Jobs Act or TCJA) that was passed last December.
Changes Coming in 2018
In a nutshell, the tax rates on long-term capital gains and qualified dividends remain the same under the TCJA as under prior law: 0%, 15% and 20%. The 3.8% net investment income tax (NIIT) also still applies to people in higher brackets. However, the tax brackets for long-term capital gains and qualified dividends are no longer tied to the federal tax brackets for ordinary income.
The following standalone tax brackets apply to long-term capital gains and qualified dividends earned in 2018.
2018 Long-Term Capital Gains and Qualified Dividends Tax Brackets
|0% Tax Rate||15% Tax Rate||20% Tax Rate|
|Single filers||$0 – $38,600||$38,601 – $425,800||$425,801 and up|
|Married people filing jointly||$0 – $77,200||$77,201 – $479,000||$479,001 and up|
|Head of household||$0 – $51,700||$51,701 – $452,400||$452,401 and up|
|Trusts and estates||$0 – $2,600||$2,601 – $12,700||$12,701 and up|
For 2018 through 2025, the trust and estate rates and brackets will be used to calculate the so-called “kiddie tax” when it applies to dependent children and young adults who collect long-term capital gains and qualified dividends.
It’s also important to note that short-term capital gains will be taxed at the ordinary-income tax rates for 2018 through 2025.
For wealthier people, the tax brackets for long-term capital gains and qualified dividends weren’t expanded to keep pace with the tax brackets for ordinary income. For example, under prior law, only people in the highest ordinary-income tax bracket (39.6%) were subject to the maximum long-term capital gains and qualified dividends rate (20%).
Under the TCJA, people must earn at least $500,000 (or $600,000 for married couples filing jointly) to qualify for the highest ordinary-income tax bracket (37%). But the 20% bracket on long-term capital gains and qualified dividends kicks in at lower levels (over $425,800 for single people, $479,000 for married couples filing jointly and $452,400 for heads of households). So, people in the 35% ordinary-income tax bracket also may be hit with the 20% tax rate on long-term capital gains and qualified dividends.
The TCJA also introduces a new investment vehicle called qualified opportunity funds (QOFs) which help direct resources to low income communities, known as Opportunity Zones, to help investors avoid capital gains tax. Check out our blog, “Opportunity Zones: Invest in your Community while Saving Tax,” to learn more.
If you’ve got investments that usually pay out dividends or that you plan to sell before 2026, our tax professionals can help you sort through the details.
The TCJA…So Many Changes, So Many Questions…we can help you navigate this huge tax overhaul! Visit our Tax Reform Center for everything you and your business need to know, now.