Capital Gains

How High Are Capital Gains Taxes in Your State?

July 25, 2016

The United States places a relatively high burden on long-term capital gains income (gains on assets held for more than one year). The top federal tax rate is 20 percent. In addition, taxpayers with AGI over $200,000 ($250,000 married filing jointly) are subject to the 3.8 percent Net Investment Income Tax. Long-term capital gains are also subject to state and local income taxes. Combined, taxpayers can expect to face a marginal rate as high as 33 percent depending on their state of residency.

Displayed on the map below is the top effective marginal tax rate on capital gains income by state. The top effective marginal tax rate is the combined federal, state, and local rate paid by the taxpayer on capital gains income in the highest tax bracket.  It varies nationally due to differences in tax regimes at the state and local levels.

At the state level, taxes on investment income vary anywhere from 0 to 13.3 percent. Three states (Alabama, Iowa, and Louisiana) allow taxpayers to deduct federal income tax paid from state taxable income, and others states also treat capital gains income in a special manner. All of these special treatments, any additional tax levied at the state or local level, and the effect of the Pease limitation on itemized deductions, are taken into account when calculating states’ top effective marginal rates.

The average rate among all states is 28.2 percent, a small decrease from the prior average of 28.7 percent in 2014. However, taking into account each state’s respective capital gains income, the weighted average rate is 28.9 percent.

Breaking this down further, the states with the highest top marginal capital gains tax rates are California (33 percent), New York (31.6 percent), Oregon (31.2 percent), and Minnesota (30.9 percent).

The lowest rate of 25 percent is shared among the nine states with no personal income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming).

Tax Topic 
Income Taxes

United States: New Filing Requirement For California Like-Kind Exchanges

Last Updated: April 21 2015
Article by David Hersch


California's new filing requirement for like-kind property exchanges made under IRC Section 1031 covers like-kind exchanges that occur in tax years beginning on or after January 1, 2014.

All taxpayers who defer tax by exchanging property in California for like-kind property outside of California must now file a Form FTB 3840 annual information return for each completed exchange. It applies to all individuals, estates, trusts and business entities, regardless of their residency status or commercial domicile.

The new form provides information about the California and non-California properties involved in the exchange. It is meant to track taxpayers' deferred gains from California properties and strengthen the enforcement of a "clawback" provision in the California tax code that applies to like-kind exchanges.  Under the clawback rules, the originally deferred gain from the sale of a California property is considered California-source income whenever the non-California replacement property is sold in a taxable transaction, no matter how many years later this occurs

Taxpayers must file Form FTB 3840 in the year the like-kind exchange is completed and each subsequent year that the related gain is deferred, even if they don't otherwise have to file a California tax return. If a taxpayer doesn't file Form 3840 as required, the state may estimate the income that was deferred and assess the tax and related penalties and interest, even though the taxpayer has not sold the replacement property and continues to defer federal tax.

Additional Changes Pending

For now, Form 3840 applies only to exchanges of real property. However, the California Franchise Tax Board is evaluating whether to make like-kind exchanges of tangible personal property subject to the new filing requirement in the future. For more information on how this new filing requirement could affect your tax planning in 2015 and beyond, contact David Hersch, Tax Senior Manager.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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