Finance

3 Tax Reform Impacts To Investors

The tax reform changes under The Tax Cuts and Jobs Act of 2017 impacts investors in a number of ways. Here are three tax reform impacts to investors that will effect your 2018 tax return. 

1 – Marginal Tax Rate Changes Impact Taxes on Long-term Capital Gains and Qualified Dividends

The 0% / 15% / 20% tax rates for long-term capital gains and qualified dividends remains the same under the Tax Cuts and Jobs Act of 2017 (TCJA).

However, changes made to the marginal rates impact the cut-off points for the lower capital gains rates. The TCJA moves away from using the taxpayer’s marginal rate to determine the capital gains rates. Instead, it creates a new set of thresholds to determine the capital gains rate. The new thresholds will be indexed for inflation.

Prior Law

2017

  Tax Cuts and Jobs Act

2018

Tax rates on ordinary income

10% / 15% / 25% / 28% / 33% / 35% / 39.6%

Tax rates on ordinary income

10% / 12% / 22% / 24% / 32% / 35% / 37%

Marginal rate:

10% or 15%

 

In 2017, this equated to taxable below:

 

$75,900 MFJ/QW

$50,800 HH

$37,950 Single

$37,950 MFS

Long-term capital gain rate

 

0%

Rate threshold:

 

 

Maximum zero rate amount

 

$77,200 MFJ/QW

$51,700 HH

$38,600 Single

$38,600 MFS

Long-term capital gain rate

 

0%

Marginal rate:

25%, 28%, 33%, 35%

 

In 2017, this equated to taxable income below:

$470,700 MFJ/QW

$444,550 HH

$418,400 Single

$235,350 MFS

Long-term capital gain rate

 

15%

Rate threshold:

 

 

Maximum 15-percent rate amount

 

$479,000 MFJ/QW

$452,400 HH

$425,800 Single

$239,500 MFS

Long-term capital gain rate

 

15%

Marginal rate

39.6%

 

Long-term capital gain rate

20%

Rate threshold:

 

Above maximum 15% rate amount

Long-term capital gain rate

20%

 

Example A:

In 2017, a married couple has $100,000 in income, $5,000 in long-term capital gains, and no other income or adjustments. The taxpayers file married filing jointly (MFJ) and claim the standard deduction.

Taxpayer’s marginal rate:

  • $100,000 ordinary income – $12,700 standard deduction – $4,050 personal exemption – $4,050 personal exemption = $79,200 taxable ordinary income
  • The taxpayers are in the 25% marginal rate bracket

Taxpayer’s long-term capital gain rate:

  • All $5,000 in long-term capital gains is taxed at the 15% rate
  • The tax on the long-term capital gains is $750 ($5,000 × 15%)

Example B:

Facts are the same as in example 1, except that it is 2018.

Taxpayer’s rate threshold:

  • $100,000 ordinary income – $24,000 standard deduction = $76,000
  • Taxpayers are below the maximum zero-percent rate amount so some of the gain will be taxed at 0%.
  • $77,200 – $76,000 = $1,200; $1,200 of the gain is taxed at 0%
  • $5,000 – $1,200 = $3,800 is taxed at 15%
  • The tax on the long-term capital gains is $570 ($3,800 × 15%)

2 – Taxpayers Selling Stock Can Continue to Use a Specific Identification Method

Shareholders who own blocks of stock purchased on different dates can select which block of stock to sell to maximize their tax savings. For example, a person with capital gains might sell off stock at a loss to harvest losses.

One proposal in the TCJA would have required taxpayers to use the first-in, first-out method. Generally, this means they would no longer be able to pick which shares they are selling. However, that proposal was not included in the legislation that became law.

Example:

In 2013, Kyle bought 10 shares of XYZ stock at $10 per share. In 2015, he bought 20 shares of XYZ stock at $20 per share. The blocks of stock are held with the same brokerage firm. Kyle wants to sell 10 shares of XYZ stock in 2017 for $15 per share. If Kyle sells 10 shares, he can choose which shares to sell. He can sell all 10 shares of the first batch for a profit of $5 per share, or he can sell 10 shares of the second batch for a loss of $5 per share.

3 – Tax-Exempt Private Activity Bonds Remain The Same

One proposal in the TCJA would have eliminated a federal income tax exemption for qualified private activity bonds. These bonds allow for tax-exempt financing for projects with some public benefit.

However, that proposal was not included in the legislation that became law.

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