February 25, 2013 12:33 pm

State Tax Burden on Capital Gains

You may be familiar with federal income tax rules on capital gains. If you’re in the bottom 2 tax brackets (10% and 15%), you pay no tax on your long-term capital gains. If you’re in the next 4 brackets (25%, 28%, 33%, and 35%), you pay a 15% rate. Starting in 2013, if you’re in the 39.6% tax bracket, you pay a 20% rate. And, if you’re in this top bracket, you also pay a 3.8% Medicare surtax on net investment income, making the effective tax rate on long-term capital gains 23.8%.

State tax rules may be quite different from the federal rules. Some states—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming—have no tax on capital gains. Taxpayers in these states pay only a federal income tax rate, if any, on long-term capital gains.

However, some states levy significant taxes on capital gains, in addition to federal taxes. California’s rate is 13.3%. When combined with the federal rate in 2013, the rates total 33%. New York, with a state tax rate of 8.8%, has a 31.4% combined state and federal long-term capital gains rate in 2013.

You can see how your state stacks up by going to the Tax Foundation (http://taxfoundation.org/article/high-burden-state-and-federal-capital-gains-taxes).

Tax Glossary

Taxable income

Net income after claiming all deductions from gross income and adjusted gross income, such as IRA deductions, itemized deductions, or the standard deduction, and personal exemptions.

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