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Capital Gains Tax Rates for 2017

March 31, 2017

Long-term capital gains currently enjoy more favorable tax rates than ordinary income.  For example, current long-term capital gains tax rates are 0%, 15%, and 20%, and the rates for ordinary income range from 10% to 39.6%.  With a new President in office, changes that may affect your long-term capital gains tax rate could be coming.

Current Capital Gains Tax Rates

To understand capital gain tax rates, you should understand the two types:

  1. Short-term gains are profits made on investments you held for one year or less. They are taxed as ordinary income.
  2. Long-term gains are profits made on investments you owned for over a year. They are taxed at lower rates, and are dependent on your marginal tax rate.

 (Your marginal tax rate is also known as your tax bracket.  If you aren’t sure of your tax bracket, you can ask your financial professional for help, or perform an internet search.)

Once you know your marginal tax rate, 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%

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.

Possible Changes

President Trump has proposed keeping the current long-term capital gains while also reducing the number of tax brackets from seven to three.  To put is another way, if Trump’s proposal goes through, your long-term tax rates could look more like this:

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

As you can see, “head of household” status is no longer an option, and there isn’t a “marriage penalty”.  Consequently, single tax brackets would be exactly half of those for married joint filers.  Many people who have enjoyed the head-of-household tax bracket would be classified as “single”, therefore seeing their long-term capital gains tax rate increase.

In addition, Trump and most of his Republican allies have made it clear they intend to repeal the Affordable Care Act.  In this case, the 3.8% investment income tax on high-earners would cease to exist.

For the majority of taxpayers, long-term capital gains taxes would either stay the same or decrease. However, the income threshold for Trump’s highest (33%) bracket is significantly lower than the highest tax bracket currently.  In short, this means more people would be included in the 20% long-term capital gains rate under the new plan.

What It Means

  • How these changes impact you depends on your income and tax filing status.
  • If you are currently in the top tax bracket, the elimination of the 3.8% additional investment income tax could be a nice benefit.
  • There is no guarantee that Trump’s proposed tax changes will be passed, so it’s important to be aware of and to understand both long-term capital gains tax possibilities for the 2017 tax year.

 

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