State and Local Taxes on Capital Gains
The expiration of the Bush capital gains tax cuts in 2010 has a lot of investors preparing to unload real estate investment property to minimize the capital gains tax on any profits they may have reaped. The Federal top tier bracket leap from 15% to 20% in 2011, for long-term capital gains may not be the only thing you have to worry. Many investors overlook the fact that most states get their hands in the till by charging state and local capital gains taxes as well. Only a few states charge a lower fee for long-term capital gains tax, so investors hoping to avoid the extra tax bite may be in for a nasty surprise.
At the Federal level, the top capital gains tax rate of 35% applies to ordinary income and to short-term capital gains. Depending on which state you live in, you’ll need to factor in the state and local capital gains tax to determine your true profit or loss. A report published in January 2010 by the Federation of Tax Administrators gives a range of 1% to 11% state income tax for Hawaii, a range of 5% to 11% for taxpayers in Oregon, a flat 5.3% for Massachusetts taxpayers and a range of 4% to 8.97% for the state of New York. Keep in mind that is only the state income tax rate and that local taxes may also apply so your overall capital gains tax rate may be much higher than you expected.
Some states (including Georgia, Delaware, Michigan and South Carolina) offer reduced capital gains tax rates for senior citizens. Still other states (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) have no state income tax and therefore no capital gains tax.
In New Hampshire and Tennessee income tax is limited to dividends and interest income only. The states with the highest income tax and capital gains tax rates are: Oregon, California, Rhode Island, Iowa, New Jersey, New York, District of Columbia, Maine, North Carolina and Minnesota.
Be sure you consult a tax preparer that is familiar with your unique state and local tax laws pertaining to capital gains tax before you decide to sell your property.