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Ask a Fool: How Could the Tax Reform Bill Affect Investment Income?

Q: How would the Tax Cuts and Jobs Act affect me if I earn the bulk of my income through dividends and interest?

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 at all. 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 that 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% tax 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 is still 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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