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If you're thinking about selling stock in December and plan to earn a profit on the sale, it may be in your best interest to wait until 2017. If President-elect Donald Trump's proposed tax brackets go into effect, waiting to sell investments could potentially save you a significant amount of money -- or not. Here's what you'll pay in capital gains taxes under the current tax code, and what would change under Trump's proposed tax plan.
Current capital gains rates
There are currently seven marginal tax rates, or tax brackets, ranging from 10% to 39.6%. Your 2017 tax bracket depends on your income and tax filing status, and you can find yours here if you have a good estimate of where your adjusted gross income will fall.
In the eyes of the IRS, there are two types of capital gains -- long-term and short-term. Long-term capital gains refer to profits you make on the sale of investments held for over a year and are taxed at more favorable rates. On the other hand, short-term capital gains are profits on investments held for one year or less and are taxed at your marginal tax rate, just like ordinary income.
The current long-term and short-term capital gains tax rates are:
Data source: IRS.
In addition, high earners are subject to an additional 3.8% tax on certain investment income, which is part of the Affordable Care Act, and can be applied to both long-term and short-term gains.
Trump wants to keep the current capital-gains tax structure in place, with short-term gains taxed as ordinary income and long-term rates of 0%, 15%, and 20%, adapted to his three proposed tax brackets:
Data source: www.donaldjtrump.com.
Also, keep in mind that Trump has proposed more than doubling the standard deduction, which would reduce many people's taxable income.
These rates would affect capital gains taxes in several ways:
- Most Americans would pay less for short-term capital gains. However, certain individuals who are currently in the 10% tax bracket would pay a bit more, and some people currently in the 25% bracket would pay the same rate.
- Long-term capital gains taxes would be unaffected for most middle-income Americans.
- High earners would benefit from the repeal of the Affordable Care Act, which is the reason for the 3.8% additional tax on certain investment income.
- However, since the thresholds for Trump's top tax bracket (33%) are lower than the income thresholds for the current top bracket (39.6%), more people would be subject to the 20% long-term capital gains tax rate and would therefore actually pay more than they currently do.
What could it mean to you? A few examples
Let's say you've held a stock for just two months, and that you own 1,000 shares, which you bought for $50. Those shares have jumped to $70 in the recent rally. That would translate to a $20,000 short-term gain. If you're part of a married couple filing a joint tax return with taxable income of $175,000, you're in the 28% tax bracket. Under Trump's plan, you would fall into the 25% bracket, which would save you 3% of the sale price, or $600.
For a long-term example, let's say you earn $750,000 per year, which puts you firmly into the top tax bracket, with a 39.6% marginal tax rate which corresponds to a 20% long-term capital gains rate. You're also subject to an additional 3.8% tax on investment income, for a total of 23.8%. Under Trump's plan, the 20% rate would still apply, but the additional 3.8% would be repealed.
If you sell a $100,000 investment that you paid $30,000 for 20 years ago, Trump's proposed changes would save you $2,660 on your tax bill. These are just a couple of examples of situations where it may be a smart idea to wait until after New Year's Day to sell.
On the other hand, let's say you're a single taxpayer with taxable income of $417,000 in 2017, which, under the current tax code would put you in the 35% tax bracket, corresponding to a 15% capital-gains tax rate. Under Trump's proposed brackets, you would be subject to the 20% tax rate on your long-term gains, as you would fall into his top bracket. In the previous example of the sale of a long-term investment for a $70,000 profit, you would have to pay $3,500 more under Trump's plan. Even with the additional 3.8% tax on investment income, the current brackets are still better for your wallet.
What it means to your investment strategy
There's no guarantee that Trump's tax rates will go into effect in 2017, but it's important to learn what they could mean to you. If you would pay less tax on the sale of an investment under Trump's plan, it may be a good idea to wait until after Jan. 1. On the other hand, if you're in a situation where your capital-gains tax could increase under the new brackets, it may be beneficial to go ahead and sell before the end of 2016.
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