Tax planning with the “simplified” tax code

Steve Merrell |

When congressional leaders first started pushing the 2017 Tax Cuts and Jobs Act, they heralded it as a major step forward in tax simplification. While much about the new tax code is simpler, it still pays to do some careful tax planning. In particular, pay attention to income thresholds and how they will affect your tax rates. This is especially true if you have some control over how much you book in taxable income in a given year. A quick example using long-term capital gains will help me make the point.

As a quick refresher, capital assets are assets held for investment. They can be financial assets such as stocks or bonds, or other assets like real estate, collectibles, art work, etc. A capital gain is the increase in the value of a capital asset above the price paid to acquire it.

We pay taxes on capital gains only after we sell the capital asset. Gains on assets held for one year or less are called short-term capital gains. If the holding period is greater than one year, the gain is considered to be “long-term.” Short-term capital gains are taxed as if they are ordinary income. Long-term capital gains are taxed at much lower rates.

Before last year’s tax reform, the tax rates on long-term capital gains were tied to your marginal tax rate.  If you were in the 10% or 15% income tax brackets, your long-term capital gains tax rate was 0%. If you were in the 39.6% income tax bracket, you paid the maximum 20% rate on long-term capital gains. Taxpayers in all other income tax brackets paid 15%.

Under the new law, the tax rate on long-term capital gains depends on income thresholds that are different from the tax bracket thresholds. Single filers with taxable income under $38,600 and married joint filers with taxable income under $77,200 now pay 0% on long-term capital gains. Single filers with taxable income in excess of $425,800, or married joint filers with taxable income greater than $479,000, now pay the 20% capital gains tax rate. Everyone else pays 15% on long-term capital gains. Once you cross an income threshold, long-term capital gains in excess of that threshold are taxed at the rate associated with that threshold. Therefore, it pays to factor those income thresholds into your decisions about realizing capital gains.

Consider a single taxpayer who retired in 2017 at age 65. Let’s suppose she has wisely saved and has significant assets in taxable investments. Based on her best projections, she expects to have $24,000 in taxable income for 2018. This means she can realize as much as $14,600 in capital gains (the difference between the $38,600 income threshold and her taxable income before capital gains) without paying any capital gains tax.

However, let’s suppose she decides to rebalance her taxable portfolio and realizes $30,000 in capital gains. In that case, her taxable income would increase to $54,000 and her tax situation would change dramatically. She still owes no tax on the first $14,600 of capital gains, but every dollar of long-term capital gain above $14,600 is taxed at the 15% rate. Instead of paying no capital gains tax, her capital gains tax will now be $2,310. With some planning, she could have spread the gains over two years and avoided the capital gains tax altogether.

Of course, you don’t want taxes to drive your investment decisions, but you should always consider the potential tax consequences. That is the essence of tax planning. Your EA or CPA can help you navigate the nuanced complexities of the new “simplified” tax law.



Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to