Tax Planning

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Profits on investments held for a year or less are subject to short-term capital gains taxes, which are the same as the ordinary income tax rates (i.e., the rates of the tax brackets we all know). Here's what the short-term rates are for 2017 and what could happen to them if President-elect Donald Trump gets his way.

How short-term capital gains are taxed

Short-term capital gains refer to the profits made on investments held for one year or less. They are taxed at the same rates as ordinary income. For instance, if you fall into the 25% tax bracket, or marginal tax rate, then your short-term capital gains are subject to a 25% tax.

For the 2017 tax year, the tax brackets, and therefore the short-term capital gains rates are as follows:

Single filers

Tax Bracket

Income Range

10%

$0-$9,325

15%

$9,326-$37,950

25%

$37,951-$91,900

28%

$91,901-$191,650

33%

$191,651-$416,700

35%

$416,701-$418,400

39.6%

$418,401 and above

Data source: IRS.

Married filing jointly

Tax Bracket

Income Range

10%

$0-$18,650

15%

$18,651-$75,900

25%

$75,901-$153,100

28%

$153,101-$233,350

33%

$233,351-$416,700

35%

$416,701-$470,700

39.6%

$470,701 and above

Data source: IRS.

Married filing separately

Tax Bracket

Income Range

10%

$0-$9,325

15%

$9,326-$37,950

25%

$37,951-$76,550

28%

$76,551-$116,675

33%

$116,676-$208,350

35%

$208,351-$235,350

39.6%

$235,351 and above

Data source: IRS.

Head of household (single, but with dependents who live with you)

Tax Bracket

Income Range

10%

$0-$13,350

15%

$13,351-$50,800

25%

$50,801-$131,200

28%

$131,201-$212,500

33%

$212,501-$416,700

35%

$416,701-$444,550

39.6%

$444,551 and above

Data source: IRS.

In addition, high-income taxpayers are subject to an additional 3.8% tax on certain investment income, effectively making the top tax rate for short-term capital gains 43.4%.

How could these rates change in 2017?

President-elect Donald Trump has proposed a significant overhaul of our tax code. Part of this overhaul includes consolidating the seven tax brackets we currently have into just three, with rates of 12%, 25%, and 33%.

Marginal Tax Rate

Taxable Income (single taxpayers)

Taxable Income (married joint filers)

12%

$0-$37,500

$0-$75,000

25%

$37,500-$112,500

$75,000-$225,000

33%

$112,500 and above

$225,000 and above

Source: www.donaldjtrump.com.

Clearly, this would be a simpler tax code, as the four charts listed earlier would be replaced by this one chart. Another simplification of Trump's would be the elimination of the head of household filing status and the removal of the "marriage penalty" -- in other words, the brackets for singles would be exactly half of those for married couples.

Trump has proposed to keep the current capital gains structure in place but adapt them to his new tax brackets. So if the Trump tax plan goes into effect as proposed, short-term capital gains rates will be the same as the new tax rates in the table above. Because the 3.8% surtax on certain investment income is part of the Affordable Care Act, which Trump plans to repeal, it would no longer be assessed.

Long-term capital gains are taxed at lower rates

One of the many reasons why long-term investing can be favorable to short-term trading is the more favorable tax treatment that comes with it. Long-term capital gains are taxed at significantly lower rates than short-term gains, especially for those in the lowest and highest tax brackets. Investments held for 366 days or more are taxed at the long-term capital gains rates.

Currently, a 0% long-term capital gains rate applies to the two lowest tax brackets, a 20% rate applies to the highest bracket (plus the 3.8% surtax on applicable investment income), and a 15% rate is applied to the four remaining tax brackets.

Presumably, under Trump's tax plan, the 0% long-term capital gains tax rate would correspond to the 12% tax bracket, the 15% rate would correspond to Trump's 25% bracket, and the 20% rate would apply to the highest bracket. As with the long-term capital gains rates, the 3.8% surtax on high-earners' investment income would be eliminated.

In a nutshell, regardless of whether or not the current tax brackets stay in place throughout 2017 or Trump's proposed brackets are implemented, it will remain significantly cheaper to invest for the long term.

One smart strategy

As a final thought, if you're in a high tax bracket, or if you're currently affected by the 3.8% investment income surtax, then it may be a smart idea to delay the sale of investments (whether long-term or short-term) until 2017 if possible.There's no guarantee that Trump's tax plan will be implemented as it was originally proposed, but with an all-Republican government, I'd be surprised if some form of tax cuts weren't passed early in Trump's administration. If you wait, you could potentially save yourself a lot of capital gains taxes.

That said, your investment thesis should always take precedent over tax considerations. Don't hold on to a hazardous investment, or sell a winning one, just because it might save you some tax dollars. The losses you incur, or the gains you miss out on, could easily outweigh the tax savings.

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