Although the tax brackets have changed under the Tax Cuts and Jobs Act, many taxpayers with relatively low income may still qualify for the zero percent federal income tax rate on long-term capital gains and qualified dividends. 415 Group Manager Brian Raber, CPA, MT, explains what taxpayers need to know under the new law.
Do you have long-term capital gains or qualified dividends? If so, there's good news: After the Tax Cuts and Jobs Act (TCJA), you might still qualify for the 0% federal income tax rate on these types of income. The rate is only available for those with relatively low income. But, if your income is too high to benefit, your children, grandchildren or other loved ones may still be eligible for the tax savings. Here are the details.
Same Rates, Different Brackets
The TCJA retains the 0%, 15% and 20% rates on long-term capital gains and qualified dividends. However, from 2018 through 2025, these rates are based on brackets that aren't tied to the ordinary income brackets. (See "Long-Term Capital Gain and Dividend Tax Brackets under Prior Law" at right.)
For 2018, the rate brackets for long-term capital gains and qualified dividends are:
| Tax Bracket |
Single |
Joint |
Head of Household |
| 0% |
Up to $38,600 |
Up to $77,200 |
Up to $51,700 |
| 15% |
$38,601 to $425,800 |
$77,201 to $479,000 |
$51,701 to $452,400 |
| 20% |
$425,801 and up |
$479,001 and up |
$452,401 and up |
After 2018, these brackets will be indexed for inflation. (See the right-hand box for a proposal to index the rate for inflation.) The TCJA also retains the 3.8% net investment income tax (NIIT) for higher-income individuals, which may apply to long-term capital gains and qualified dividends. So, for 2018 through 2025, the tax rates for higher-income people who recognize long-term capital gains and dividends and are affected by the NIIT are 18.8% (15% + 3.8% for the NIIT) or 23.8% (20% + 3.8% for the NIIT).
Who Could Benefit?
| Long-Term Capital Gain and Dividend Tax Brackets Under Prior Law Before the Tax Cuts and Jobs Act (TCJA), individuals faced three federal income tax rates on long-term capital gains and qualified dividends: 0%, 15% and 20%. Prior law (before 2018) tied the rate brackets for long-term capital gains and dividends to the ordinary income rate brackets as follows:
In addition, under prior law, long-term capital gains and qualified dividends for high-income individuals were subject to the 3.8% net investment income tax (NIIT). |
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| A Capital Gains Tax Cut in the Making? The Trump Administration is studying whether it can bypass Congress and grant a tax cut to taxpayers with capital gains. How? By taking inflation into account when figuring capital gains tax liabilities. Currently, the capital gains tax rate is applied to the difference between the price of an asset when it's purchased and when it's sold. The calculation doesn't take inflation into account. In newspaper reports, members of the administration have argued that President Trump has the authority to index capital gains for inflation. That's because a 2002 U.S. Supreme Court ruling gives regulators the power to determine how "cost" is defined. In a New York Times interview, U.S. Treasury Secretary Steven Mnuchin said: "If it can't get done through a legislation process, we will look at what tools at Treasury we have to do it on our own and we'll consider that. We are studying that internally, and we are also studying the economic costs and the impact on growth." |
Here are some examples of taxpayers who are still eligible for the 0% rate bracket for long-term capital gains and qualified dividends:
The adjusted gross income figures provided in these examples don't take into account any above-the-line write-offs, such as:
To the extent that these hypothetical taxpayers have above-the-line deductions, their adjusted gross income could be that much higher without falling outside the 0% rate bracket for long-term gains and dividends.
Additionally, if an individual itemizes deductions — rather than taking the standard deduction — his or her adjusted gross income (including long-term capital gains and dividends) could be even higher than levels illustrated by these examples.
How Can High-Income People Help Loved Ones Cash In?
Is your income too high to benefit from the 0% rate on long-term capital gains and qualified dividends? You may have children, grandchildren or other loved ones who qualify for the break. If so, consider gifting them some appreciated stock or mutual fund shares. They can then sell the investments, and pay 0% tax on any resulting long-term capital gains. But there's a hitch: Gains will be considered "long-term" only if the ownership period of the donor and the gift recipient (combined) is at least a year and a day.
Giving away stocks that pay dividends can be another tax-smart idea. As long as the dividends fall within the gift recipient's 0% rate bracket, they'll be federal-income-tax-free.
For 2018, the annual gift tax exclusion for each individual is $15,000 per gift recipient. For example, by making joint gifts, a married couple could give investments worth up to $60,000 to their son and daughter-in-law (combined) without incurring gift tax or dipping into the unified federal gift and estate tax exemption. For 2018, this exemption is $11.18 million (effectively $22.36 million for married couples).
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The 0% tax rate on long-term capital gains and qualified dividends applies only to long-term capital gains and dividends that accumulate in taxable investment accounts (like brokerage firm accounts) and long-term gains from investment assets (like real estate) that are held outside of tax-favored retirement accounts, including traditional IRAs and 401(k) accounts.
If you have questions or want more information about whether this potentially valuable tax break could work for you or members of your family, contact 415 Group.
Proper planning will allow married taxpayers filing a joint tax return to completely avoid federal income tax on long term gains even though their taxable income (after deductions) is up to $77,200.
The long-term capital gains tax is a nice income tax planning and strategy tool. There’s a zero percent tax rate that allows some income to come through tax-free in certain situations, based on your filing status and the amount of your taxable income. While it has always been available, the rules are a little bit different under the Tax Cuts and Jobs Act.
They tweaked the income levels slightly, so now, the rates are based on brackets that aren't tied to the ordinary income brackets.
Some taxpayers may not be aware that this is available, so we always explain this opportunity to our clients when the situation arises.
Higher-income taxpayers, who don’t qualify for the zero percent tax rate, can still benefit. If they have other loved ones—children or grandchildren—who are in lower income tax brackets, they can gift them appreciated stock or mutual fund shares. Their loved ones can sell it and recognize the gains.
However, one thing to be careful of is the ‘kiddie tax.’ If you’re giving to kids or grandkids, who are still being claimed as dependents on their parents’ tax returns, then in most cases, they’re not going to get the benefit of the zero percent tax.
Now is the time to start planning. Reach out to us, and we’ll help you explore opportunities to take advantage of the long-term capital gains tax. We can help you determine your best options.