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The New Tax Law May Change the Capital Gains Tax Rate You Pay

By Sandra Block
Kiplinger’s Personal Finance

The Tax Cuts and Jobs Act left capital gains rates the same, but how that rate is determined has been changed under the new law.

Most people with taxable accounts will continue to pay 15 percent on long-term capital gains and qualified dividends. Significantly, the tax law also preserves the 0 percent capital gains rate for eligible taxpayers, a popular tax-saving feature for retirees with taxable investments but not a lot of other income.

The law, though, may change which rate you pay. In the past, the rate was based on your tax bracket. Taxpayers in the 10 percent and 15 percent brackets paid 0 percent, and those in the top tax bracket paid 20 percent. Now, the rate will be based on income thresholds. For 2018, the 0 percent rate for long-term gains and qualified dividends will apply to taxpayers with taxable income that’s less than about $38,600 on individual returns and about $77,200 on joint returns. Taxpayers with taxable income that’s more than those amounts but less than $425,800 ($479,000 for married couples) will pay 15 percent, and taxpayers with higher income will pay 20 percent.

The law also revises the way the so-called kiddie tax is calculated, and that could make custodial accounts under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) more (or less) expensive for some families. The tax applies to investment income that exceeds $2,100 earned by children younger than 19 or, if full-time students, younger than 24. In the past, investment income over that amount was generally taxed at the parents’ rate. Now it will be taxed at the same rates as for trusts and estates, with a top rate of 37 percent of income over $12,500.

That doesn’t necessarily mean parents will pay more under the new tax regime. Consider, for example, a situation in which a child has $5,000 of income subject to the kiddie tax and the parents have taxable income of $150,000. In 2017, applying the parents’ 25 percent rate to the $5,000 would have cost $1,250. If the old rules still applied, using the parents’ new 22 percent rate would result in a $1,100 tax on that $5,000 of income. Applying the new trust tax rates produces a kiddie tax bill of just $843 on the child’s investment income. Other parents could see taxes on these accounts increase, which is why it’s important to run the numbers with a financial adviser.

Editor’s Note: Sandra Block is a senior editor at Kiplinger’s Personal Finance magazine,

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