By Laura Saunders

High-earning American taxpayers are likely to benefit from a significant rate drop for capital gains in 2017.

That's because major changes are likely for taxes on individuals' investment income such as capital gains and dividends next year, when Republicans will control both the White House and Congress. While lower earners could see tax increases and should consider reaping benefits now before they shrink, high earners might do well by deferring such income where possible.

Exactly what the changes will be is unclear. The proposals offered by President-elect Donald Trump and Republicans in the House of Representatives take very different approaches. Also in the mix is a 2014 plan from then-House Ways & Means Chairman Dave Camp (R., Mich.).

One area of agreement: Both the Trump and the House GOP plans want to jettison the current 3.8% surtax on net investment income, which took effect in 2013. The threshold is $250,000 of adjusted gross income for couples and $200,000 for singles.

Beyond that, the proposals diverge. Trump's plan retains the current three-tier rate structure of 0%, 15% and 20% for long-term capital gains on assets held longer than a year and "qualified" dividends on stock typically held longer than 60 days.

But these would have new thresholds. For example, under current law the top 20% rate takes effect at $466,950 of taxable income for couples and $415,050 for singles. Under Trump's plan, the 20% rate would kick in at taxable income of $225,000 for couples and $112,500 for singles.

Even allowing for changes in the definition of taxable income, this move could raise investment-income taxes for some people, says Len Burman, a capital-gains expert who heads the nonpartisan Tax Policy Center in Washington.

The House GOP plan reverts to an older system that taxes a portion of investment income at regular rates and excludes the rest. In the plan, there is a 50% exclusion for capital gains, qualified dividends and -- for the first time -- interest income.

Thus if a top-bracket taxpayer has a long-term gain of $10,000, then $5,000 would be excluded and the rest taxed at the top rate of 33%. The tax would be $1,650, for an effective rate of 16.5%.

Under this plan, the current 0% rate on investment income for the lowest earners would rise to 6%. The current top rate of 23.8% (on capital gains and dividends) or 43.4% (on interest) would fall to 16.5%. Many in the middle would owe 12.5%, compared with perhaps 15% now.

Mr. Burman thinks the House GOP plan has an edge: "Earlier this year the Trump plan was revised to be more in line with the House GOP proposals, and I expect that trend to continue."

In particular, provisions that raise investment taxes for lower earners might become more generous, he says, in an effort to boost support for a tax cut that mostly benefits high earners and the wealthy. In 2016, 78% of capital gains and 52% of qualified dividends will go to the top 1% of households, those earning more than about $700,000, according to the Tax Policy Center.

Amid these uncertainties, planning can be difficult, says Troy Lewis, a CPA in Draper, Utah who has been fielding calls from anxious investors. Here are moves to consider.

* Deferring investment income. For investors subject to the 3.8% surtax, deferral is often a good option. Others will need to weigh expected savings against nontax considerations, such as market risk.

* Harvesting gains. Many investors now in the 0% bracket sell shares and then repurchase them right away, which the law allows. Doingso doesn't incur tax and resets the investor's cost higher, so if he needs to sell later the taxes will be lower. This is still a good idea, says Mr. Lewis.

* Using losses. Investors can use capital losses to offset capital gains plus as much as $3,000 of income such as wages a year. It's usually good to use losses where possible, and if rates drop next year, they will be worth less in the future.

* Timing. To avoid disrupting markets and stimulate sales, lawmakers historically have made reductions in capital-gains taxes take effect well before the bill becomes law, perhaps on the date of introduction or committee adoption. That date is unclear, however.

Write to Laura Saunders at laura.saunders@wsj.com

(END) Dow Jones Newswires

November 25, 2016 10:36 ET (15:36 GMT)

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