How The New Capital Gains Tax Laws Impact Your CPA Firm

The Tax Cuts and Jobs Act did not directly change the tax rate on capital gains. They remain at 0, 10, 15 and 20 percent, respectively with the 25- and 28-percent 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 they may be enjoyed.

Capital Gains Tax Rates

The maximum rates on net capital gain and qualified dividends are generally the same and are 0 percent, 15 percent, and 20 percent. The 15-percent breakpoint and the 20-percent breakpoint are generally the same, except the breakpoints are indexed using the new C-CPI-U factor in tax years beginning after 2018:

The 15-percent 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.

The 20-percent 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 household, $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-percent breakpoint, such gain is not taxed.

These breakpoints are not aligned with the new general income tax rate brackets. For example, alignment for joint filers would have the 15-percent breakpoint at $77,400 rather than $77,200 and more significantly, 20 percent 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 28-percent rate gain is taxed at a maximum rate of 28 percent. In addition, an individual, estate, or trust also remains subject to the 3.8 percent tax on net investment income (NII tax).

Kiddie 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-percent capital gain rate starts at $2,600 and rising to 20 percent when $12,700 is reached.

Carried Interest

Capital gain passed through to fund managers via a partnership profits interest (carried interest) in exchange for investment management services must meet an extended three-year holding period to qualify for long-term capital gain treatment.

If a taxpayer holds an applicable partnership interest at any time during the tax year, this rule treats carried interest as short-term capital gain—taxed at ordinary income rates— based on a three-year holding period instead of the usual one-year period.

SSBIC Rollovers

In the past, C corporations and individuals could elect to defer recognition of capital gain 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).

The new tax 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).

Like-kind Exchanges

Like-kind exchanges have often been used to defer taxable gains. Going forward, like-kind exchanges are allowed only for real property after 2017. Like-kind exchanges are no longer available for depreciable tangible personal property, and intangible and non-depreciable personal property after 2017. Gain on those assets will no longer be allowed to be deferred.

Code Sec. 199A Deduction

The concept of capital gain is intertwined within the new passthrough deduction for partnerships, S corporations and sole proprietorships under Code Sec. 199A in several ways.

The Code Sec. 199A deduction cannot be more than the taxpayer’s taxable income reduced by net capital gain for the tax year, making monitoring of capital gains a “must” for some taxpayers.

If you have any questions about how these changes to capital gains could impact your tax return, please consult your tax accountant at our CPA firm.