“Making Sense of the New Tax Legislation” ( JofA, Sept.01, page 22) states, “When the rate cut fully takes effect, the difference between the 20% rate on long-term capital gains for the average investor (those who previously had fallen into the 28%, 31%, 36% or 39.6% tax brackets) and ordinary income tax rates will be only 5%, 8%, 13% and 15%, respectively.” I believe this is completely incorrect and highly misleading. In fact, the figures given are the differences expressed in percentage points and are totally unrelated to the concept of a percentage decrease or increase.
For example, the difference between a 28% rate on ordinary income and the 20% capital gains rate would result in an investor’s paying 40% more tax [(28% – 20%) / 20%] on ordinary income than on capital gains, not the 8% stated. Therefore, I submit that the difference in actual dollars of tax will remain extremely significant.
An investor in the new 35% bracket will still pay 75% more tax [(35% – 20%) / 20%] in dollars on short-term gains than on long-term gains. This difference could be greater if you consider the availability of the 18% tax rate on five-year holdings that kicks in this year.
Andrew M. Atkinson,
CPA, CMA, CFM
Author’s reply: While in many instances “percent” is confused with “percentage points,” the article was referring to differences in rates, which are expressed as percents. Thus, 25% minus 20% is 5%, although you are quite correct that 25% less 5% of 25% is not 20%.
Highlighting the actual tax effect of the two rates or at least contrasting the old and new spread in the rates, rather than just giving the new spreads, might have made the article clearer.
For the most part the differences between ordinary income tax rates and capital gains rates are still significant—they are just not as significant as they once were. In one case, the capital gains rates would now be higher than the ordinary income rates. For gains on collectibles and on the sale of IRC section 1202 stock, the 28% capital gains rate would actually be higher than the new 25% ordinary income rate.
Mark A. Luscombe, CPA
George G. Jones, JD