Value Investment Research| Port Wren Capital | The New 2018 Tax Law and Capital Gains

The New 2018 Tax Law and Capital Gains

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If you invest in individual stocks like we do at Port Wren Capital, LLC, then you need to have an understanding of the new tax law and the impact it has on your capital gains tax beginning in 2018 and beyond.

First, let’s look at the capital gains tax before the recent 2018 law. There are two categorizes of capital gains. One is Short-Term capital gains and the other is Long-Term capital gains. Any gains on short-term is taxed at the Ordinary Income tax rate. Short-term is defined as holding the stock for less than one year. While stocks held for longer than one year are defined as long-term. Under the old law there were three tax brackets for long-term capital gains that included: 0%, 15% and 20%. Capital gains tax rates are more favorable compared to the rates for ordinary income which ranged from 10% up to 39.6%. Your long-term (LT) capital tax rate depends on your marginal tax rate or tax bracket. Once you know your marginal tax rate and your filing status, you can figure your long-term capital gains tax rate.

If Marginal is 10%, then LT Capital is 0%. If Marginal is 15%, then LT Capital is 0%. If Marginal is 25%, then LT Capital is 15%. If Marginal is 28%, then LT Capital is 15%. If Margin is 33%, then LT Capital is 15%. If Margin is 35%, then LT Capital is 15%. If Marginal is 39.6%, then LT Capital is 20%. Under the old law, the LT Capital gains tax rate applied to the two bottom marginal brackets, while the 15% LT Capital Gain rate applied to the next four brackets and the 20% LT Capital Gains rate applied to the top margin bracket.

Under the new tax law, the same three capital gains rates are the same. However, the three long-term (LT) capital gain rates don’t align with the marginal tax brackets as before. Instead they are applied to maximum taxable income levels as indicted here.

If filing status is Married Filing Jointly (MFJ), and taxable income is Up to $77,200, then the LT Capital Gains Tax is 0%.

If filing status is Married Filing Jointly (MFJ), and taxable income is $77,200 to $479,000, then the LT Capital Gains tax is 15%.

If filing status is Married Filing Jointly (MFJ), and taxable income is Over $479,000, then the LT Capital Gains tax is 20%.

The taxable income ranges do vary from the above if your filing status is either Single or Married Filing Single (MFS). Although, the three long-term capital tax rates did not change and their alignment did. You can easily see the major tax advantage in investing in individual stocks compared to ordinary income like your W-2 wages. Why would you not want to invest in stocks long-term, and make money at a much lower tax rate? We can help you with your stock investments that can also reduce your tax liabilities.

At Port Wren Capital, LLC, we specialize in picking specific undervalued U.S. stocks using fundamental analysis developed by Benjamin Graham using a five step process. We have beaten the S&P500, DJIA and NASDAQ benchmarks since we started 5 years ago on our own investments. Discover the difference for yourself. To learn more contact us today.

Published: 5/1/18

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