The Tax Cuts and Jobs Act did not directly change the tax rate on capital gains; they remain at 0, 10, 15 and 20%, respectively (with the 25% and 28% rates also reserved for the same special situations). However, changes within the new law impact both when the favorable rates are applied and the level to which to may be enjoyed.
Capital gains rates
The maximum rates on net capital gain and qualified dividends are generally retained after 2017 and are 0, 15, and 20%. The breakpoints between the 0 and 15% rates (“15% breakpoint”) and the 15 and 20% rates (“20% breakpoint”) are generally the same amounts as the breakpoints under prior law, except the breakpoints are indexed using the new Chained Consumer Price Index for All Urban Consumers (C-CPI-U) factor in tax years beginning after 2018.
- the 15% breakpoint is $77,200 for joint returns and surviving spouses (one-half of this amount, $38,600, for married taxpayers filing separately), $51,700 for heads of household, $2,600 for estates and trusts, and $38,600 for other unmarried individuals; and
- the 20% breakpoint is $479,000 for joint returns and surviving spouses (one-half of this amount for married taxpayers filing separately), $452,400 for heads of households, $12,700 for estates and trusts, and $425,800 for other unmarried individuals.
In the case of an individual (including an estate or trust) with adjusted net capital gain, to the extent the gain would not result in taxable income exceeding the 15% breakpoint, such gain is not taxed.
The breakpoints are not aligned with the new general income tax rate brackets. For example, alignment for joint filers would have the 15% breakpoint at $77,400 rather than $77,200; and, more significantly, 20% at $600,000 rather than at $479,000. Instead, they continue the alignment themselves more closely to the prior-law rate brackets.
As under prior law, unrecaptured section 1250 gain generally is taxed at a maximum rate of 25 percent, and the 28% rate gain is taxed at a maximum rate of 28%. In addition, an individual, estate, or trust also remains subject to the 3.8% tax on net investment income (NII tax).
Effective for tax years beginning after December 31, 2017, and before January 1, 2026, the “kiddie tax” is simplified by effectively applying ordinary and capital gains rates applicable to trusts and estates to the net unearned income of a child. A child’s “kiddie tax” is no longer affected by the tax situation of his or her parent or the unearned income of any siblings.
Taxable income attributable to net unearned income is taxed according to the brackets applicable to trusts and estates, with respect to both ordinary income and income taxed at preferential rates. For 2018, that means that the 15% capital gain rate starts at $2,600 and rises to 20% when $12,700 is reached.
When fund managers receive “partnership profits interest” (also known as carried interest) in exchange for their investment management services and there is capital gain passed through from the partnership, the capital gain can be treated as long-term capital gain only if it meets an extended three-year holding period. Under the new laws, if a taxpayer holds an applicable partnership interest at any time during the tax year, this rule treats the capital gain as short-term capital gain taxed at ordinary rates based on a three-year holding period versus the usual one-year holding period for long-term capital gain treatment.
For sales after 2017, the new law repeals the election to defer recognition of capital gain realized on the sale of publicly traded securities if the taxpayer used the sale proceeds to purchase common stock or a partnership interest in a specialized small business investment company (SSBIC). Prior to 2018, under former Code Sec. 1044, C corporations and individuals could elect to defer recognition of capital gains realized on the sale of publicly traded securities if the taxpayer used the sales proceeds within 60 days to purchase common stock or a partnership interest in a specialized small business investment company (SSBIC).
Like-kind exchanges have often been used to defer taxable gains. Going forward, like-kind exchanges are allowed only for real property after 2017 (Code Sec. 1031(a)(1)). Like-kind exchanges are no longer available for depreciable tangible personal property, and intangible and nondepreciable personal property after 2017. Gain on those assets will no longer be allowed to be deferred.
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