Long-term capital gains are taxed at more favorable rates than ordinary income. The current long-term capital gains tax rates are 0%, 15%, and 20%, while the rates for ordinary income range from 10% to 39.6%. However, big changes could be coming to the tax brackets in 2017, and your long-term capital gains tax rate could be affected. Here's what you need to know about the current capital gains tax structure, and what could change for 2017.
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The current 2017 capital gains tax rates
First of all, there are two types of capital gains tax rates. Short-term capital gains are profits made on investments you sell that were held for one year or less, and they are taxed as ordinary income. On the other hand, long-term capital gains, which are profits made on investments you owned for over a year and then sell, are taxed at lower rates.
Your long-term capital gains tax rate depends on your marginal tax rate, or tax bracket, and you can find a full guide to the 2017 brackets here. Once you know your marginal tax rate for your income level and tax filing status, you can match it to your long-term capital gains tax rate in this table:
|
Marginal Tax Rate (Tax Bracket) |
Long-Term Capital Gains Tax Rate |
|---|---|
|
10% |
0% |
|
15% |
0% |
|
25% |
15% |
|
28% |
15% |
|
33% |
15% |
|
35% |
15% |
|
39.6% |
20% |
Data source: IRS.
In addition, high-income taxpayers are assessed an additional 3.8% tax on certain investment income, as part of the Affordable Care Act.
Our new president might make a change
President-elect Donald Trump has proposed that we keep the current long-term capital gains tax rates of 0%, 15%, and 20% but proposes that we reduce the number of tax brackets from seven to three. With a Republican-controlled Congress whose tax plan is quite similar, he has a strong chance of making these changes in 2017.
Trump's simplified and consolidated tax brackets, and their corresponding long-term capital gains tax rates are:
|
Marginal Tax Rate |
Taxable Income (Single) |
Taxable Income (Married Joint Filers) |
Long-Term Capital Gains Rate |
|---|---|---|---|
|
12% |
$0-$37,500 |
$0-$75,000 |
0% |
|
25% |
$37,500-$112,500 |
$75,000-$225,000 |
15% |
|
33% |
$112,500 and above |
$225,000 and above |
20% |
Data source: www.donaldjtrump.com
Notice that there is no more "head of household" or status, nor is there a "marriage penalty" -- that is, the single tax brackets are now exactly half of those for married joint filers. Many people who have enjoyed the more favorable head-of-household tax brackets would be classified as "single" and could see their long-term capital gains tax rate increase.
In addition, since Trump and most of his Republican allies have made it clear that they intend to repeal the Affordable Care Act, the 3.8% investment income tax on high-earners would cease to exist.
A couple of things to notice. For the majority of taxpayers, long-term capital gains taxes would either stay the same or decrease. However, notice that the income threshold for Trump's highest (33%) bracket is significantly lower than the highest tax bracket currently. This means that a lot more people would be included in the 20% long-term capital gains rate under the new plan.
What this could mean to you
If President-elect Trump's new tax brackets go into effect, the impact on your long-term capital gains tax rates, if any, depends on your income and tax filing status.
For those currently in the top tax bracket, the elimination of the 3.8% additional investment income tax could be a nice benefit, so it may be a good idea to hold off selling investments, if possible, until 2017.
Finally, be aware that there's no guarantee that Trump's proposed tax changes will be passed in 2017, and if they are, there's no guarantee that they will be retroactive to Jan. 1, 2017. Therefore, it's important to be aware of and to understand both long-term capital gains tax possibilities for the 2017 tax year.
Taking advantage of some simple tips can help you cut your tax bill.
