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Your Guide to Capital Gains Taxes in 2018

By Matthew Frankel, CFP® - Updated Jun 21, 2018 at 1:19PM

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Here's what investors need to know about how the Tax Cuts and Jobs Act could affect your capital gains taxes.

Congress recently passed the Tax Cuts and Jobs Act, so it appears that sweeping tax changes are set to go into effect in 2018. While the bill makes a number of changes to our individual tax code, one concern to investors is the capital gains tax. Here's a rundown of the capital gains tax structure for 2018, and how you could be affected.

What stays the same

In a nutshell, nothing changed in the basic capital gains tax structure.

For starters, long-term capital gains are still defined as gains made on assets that you held for over a year, while short-term capital gains come from assets you held for a year or less. Long-term gains are taxed at rates of 0%, 15%, or 20%, depending on your tax bracket, while short-term gains are taxed as ordinary income.

IRS tax forms and a pencil on top of a pile of U.S. currency.

Image source: Getty Images.

Also, for both types of capital gains, it's worth noting that the 3.8% net investment income tax that applies to certain high earners will stay in place, with the exact same income thresholds. This is part of the Affordable Care Act, which, as of this writing, Congress has not successfully repealed or replaced, so this tax remains.

As I mentioned, the long-term capital gains tax rates of 0%, 15%, and 20% still apply. However, the way they are applied has changed slightly. Under previous tax law, the 0% rate was applied to the two lowest tax brackets, the 15% rate was applied to the next four, and the 20% rate was applied to the top bracket.

Under the Tax Cuts and Jobs Act, the three capital gains income thresholds don't match up perfectly with the tax brackets. Instead, they are applied to maximum taxable income levels, as follows:

Long-Term Capital Gains Rate

Single Taxpayers

Married Filing Jointly

Head of Household

Married Filing Separately

0%

Up to $38,600

Up to $77,200

Up to $51,700

Up to $38,600

15%

$38,600-$425,800

$77,200-$479,000

$51,700-$452,400

$38,600-$239,500

20%

Over $425,800

Over $479,000

Over $452,400

Over $239,500

Data source: Tax Cuts and Jobs Act.

If you look at the tax bracket charts later in this guide, you might notice that these thresholds are based on the previous tax brackets. In other words, your long-term capital gains taxes in 2018 will be virtually the same as they would have been if no tax reform bill was passed.

Short-term capital gains are still taxed as ordinary income

On the short-term capital gains side, I mentioned that short-term gains are still considered ordinary income, so the effect is more obvious. If your marginal tax rate has changed, your short-term capital gains tax will change as well. For comparison, here are the newly passed 2018 tax brackets:

Marginal Tax Rate

Single

Married Filing Jointly

Head of Household

Married Filing Separately

10%

$0-$9,525

$0-$19,050

$0-$13,600

$0-$9,525

12%

$9,525-$38,700

$19,050-$77,400

$13,600-$51,800

$9,525-$38,700

22%

$38,700-$82,500

$77,400-$165,000

$51,800-$82,500

$38,700-$82,500

24%

$82,500-$157,500

$165,000-$315,000

$82,500-$157,500

$82,500-$157,500

32%

$157,500-$200,000

$315,000-$400,000

$157,500-$200,000

$157,500-$200,000

35%

$200,000-$500,000

$400,000-$600,000

$200,000-$500,000

$200,000-$300,000

37%

Over $500,000

Over $600,000

Over $500,000

Over $600,000

Data source: Joint Explanatory Statement of the Committee of Conference.

And, here are the previous 2018 tax brackets (which were announced by the IRS but will not go into effect):

Marginal Tax Rate

Single

Married Filing Jointly

Head of Household

Married Filing Separately

10%

$0-$9,525

$0-$19,050

$0-$13,600

$0-$9,525

15%

$9,525-$38,700

$19,050-$77,400

$13,600-$51,850

$9,525-$38,700

25%

$38,700-$93,700

$77,400-$156,150

$51,850-$133,850

$38,700-$78,075

28%

$93,700-$195,450

$156,150-$237,950

$133,850-$216,700

$78,075-$118,975

33%

$195,450-$424,950

$237,950-$424,950

$216,700-$424,950

$118,975-$212,475

35%

$424,950-$426,700

$424,950-$480,050

$424,950-$453,350

$212,475-$240,025

39.6%

Over $426,700

Over $480,050

Over $453,350

Over $240,025

Data source: IRS.

How it could affect your short-term capital gains tax

For example, let's say you're single and have taxable income of $50,000 per year. If you buy a stock and sell it a couple of months later for a $2,000 profit, you would have to pay tax at a rate of 25% under the previous tax brackets, while the new tax brackets give you a lower 22% marginal tax rate. This would result in tax savings on your stock sale of $60.

The Foolish bottom line

While nothing significant changed in the capital gains tax structure, or in the long-term capital gains tax rates, your 2018 short-term capital gains tax could change because of the new tax brackets. Generally lower marginal tax rates and different income thresholds for most tax brackets combine to produce a potential short-term capital gains tax cut for many Americans.

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