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.
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.
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.)
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 your tax advisor.
Paying Taxes on Short-Term Capital Gains
As under prior law, the Tax Cuts and Jobs Act (TCJA) taxes short-term capital gains recognized by individual taxpayers at the regular ordinary-income rates. For 2018, the ordinary-income rates and brackets are as follows: