In­vest­ment in­come

Q: How could tax re­form bill af­fect div­i­dends, in­ter­est?

Chicago Sun-Times - - AMERICA'S MARKETS - Matthew Frankel

A: First, let’s talk about what won’t change if this leg­is­la­tion passes.

The bill makes no changes to long- term cap­i­tal gains tax rates, which also ap­ply to qual­i­fied div­i­dends. These rates are cur­rently 0% for tax­pay­ers in the two low­est tax brack­ets, 15% for the next four brack­ets and 20% for tax­pay­ers in the high­est tax bracket. This pro­posal keeps the same in­come thresh­olds in place that ap­ply to these rates now.

In ad­di­tion, since the ad­di­tional 3.8% net in­vest­ment in­come tax on high earn­ers is part of the Af­ford­able Care Act, it isn’t go­ing any­where.

Also, re­tire­ment sav­ings tax breaks aren’t chang­ing. Although law­mak­ers had con­sid­ered re­duc­ing the max­i­mum amounts you could con­trib­ute an­nu­ally to a 401( k), IRA, or other tax- ad­van­taged re­tire­ment plan, such cuts were left out of this pro­posal.

Fi­nally, short- term cap­i­tal gains and in­ter­est in­come would still be taxed at your or­di­nary in­come rate.

Here’s the one change you should be aware of. While the way short- term gains and in­ter­est in­come are taxed wouldn’t change, your rates could. For ex­am­ple, if you’re cur­rently in the 15% tax bracket and would be in the 12% bracket un­der the pro­posed plan, your in­ter­est in­come would be taxed at your new, lower rate.

Above all, it’s im­por­tant to point out that the tax re­form ef­fort re­mains a very fluid sit­u­a­tion, and a fi­nal bill is likely to look sig­nif­i­cantly dif­fer­ent than the one that was just re­leased.

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