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Friday, August 27, 2010

Consider State And Local Taxes Before You Take Capital Gains

Consider State And Local Taxes Before You Take Capital Gains


Thinking of selling before rates rise? First consider the state and local tax bite.

Should you rush to take long-term capital gains before Jan. 1, when the top federal gains rate is set to rise from 15% to 20%? That depends, of course, on many factors, including whether you'll be needing cash or otherwise wanting to liquidate a holding in the next few years anyway.

But investors often overlook another key variable: the state and local tax bite. "It's kind of a forgotten-about tax," reports Carl DiNicola, an Ernst & Young partner in Irvine, Calif. It shouldn't be; 42 states tax gains and only a few of them have lower rates for long-term gains, making state tax a big deal when you take profits.

http://www.forbes.com/2010/08/25/state-capital-gains-taxes-personal-finance-10-highest-state-tax-rates_slide_2.html

At the federal level, ordinary income such as salary is taxed this year at a top 35% rate, more than twice the gains rate. But New York City residents pay the same top 12.9% state/local rate on salary and gains. Oregonians pay a top 11% rate and Californians a top 10.6% rate on both. In fact, among the highest tax states, only Hawaii, with a top 11% rate on ordinary income, cuts long-term gains a break; they're taxed at a top 7.25% rate.

In reality, then, you may not be deciding whether to pay a 15% tax now or 20% later but whether to pay, say, a 25% tax now or 30% later. "It may in many cases be unwise to sell something this year just to get the lower [federal] tax rate," say Kaye Thomas, a tax lawyer and author of Capital Gains, Minimal Taxes. Here are additional pointers:

Investigate the quirks.

Each state has little crazy rules," says Barry Horowitz, director of state and local tax for Eisner & Lubin in New York City. New Jersey, for example, doesn't allow taxpayers to carry forward capital losses, as is allowed for federal tax purposes. Tennessee taxes capital gains from the sale of mutual funds but not individual stocks. New Jersey, Connecticut, Kentucky and Ohio exempt gains on their own state's bonds from tax.

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