Last week, the White House unveiled an outline of President Trump’s official tax reform proposal. While most Americans are focused on the major overhaul of corporate and income taxes, some investors are more concerned about capital gains taxes. While the initial outline barely even touched on capital gains taxes, here’s what you need to know about what could change.
To begin with, it’s important to understand how capital gains taxes work in the first place. Capital gains taxes are split into two different categories. Short-term capital gains on assets sold within a year of when they are purchased are taxed at a higher rate than capital gains earned on assets held for at least a year.
Short-term capital gains are taxed at the same top marginal rate as a taxpayer’s ordinary individual income. If you just filed your 2016 taxes, you may be familiar with the current short-term capital gains tax brackets included in the chart below.
|Tax Bracket||Income Range|
|39.6%||$418,401 and above|
DATA SOURCE: IRS.
Long-term capital gains tax rates fall into only three brackets, and 99% of long-term American investors fall into only two of those three brackets. Long-term capital gains tax rates in 2016 were also based on marginal income rates but were not directly correlated. Current long-term capital gains rates are included in the chart below.
|Marginal Tax Rate (Tax Bracket)||Long-Term Capital Gains Tax Rate|
DATA SOURCE: IRS.
Trump hasn’t released a full version of his official tax plan. In the new outline, the only specific mention of capital gains involved cutting the top rate from 23.8 percent to 20 percent.
However, investors can make several assumptions based on previous Trump proposals. Trump specifically said he will be reducing the total number of income tax brackets down to three rates: 10 percent, 25 percent, and 35 percent. Although the outline did not include the income levels at which the brackets will begin and end, Trump proposed the following brackets during campaign season:
|Marginal Tax Rate||Taxable Income (Single)||Taxable Income (Married Joint Filers)||Long-Term Capital Gains Rate|
|33%||$112,500 and above||$225,000 and above||20%|
DATA SOURCE: www.donaldtrump.com
Assuming Trump intends to keep similar brackets and keep long-term capital gains tax rates in-line with marginal income tax rates, investors can speculate Trump intends to keep the boundaries of the brackets relatively close to those in the previous proposal.
If that is the case, here’s what Trump’s capital gains brackets could look like for individuals:
Investors should note that the details on Trump’s capital gains brackets have not yet been released and Trump’s proposal is open to modification by Congress prior to getting passed. However, it’s likely that almost all investors will be getting at least a modest tax cut under Trump’s plan.
Regardless of the version of tax reform that is ultimately passed into law, investors should remember that there is almost always a significant tax benefit to waiting at least one year before selling stocks and other assets to trigger the long-term tax rates.
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