Equity gains -- that is to say, the profits you make on your stock investments -- are the main reason people invest in the stock market. It doesn't help your cause if the government taxes a big chunk of your profits as capital gains taxes. For long-term gains, the federal tax rate is lower than your ordinary income tax rate, but depending on where you live, you must also pay tax on your capital gains to the state. Only a handful of states do not tax equity gains.
No Tax States
The states that do not tax equity or capital gains are the same states that do not have any income tax. If you live in one of these states, you already know your income is not taxed, whether from wages or investment gains. The nine states with no income tax are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. None of the states that impose a state income tax exempts equity gains from those taxes.
Low Equity Tax States
Among the 41 states with income taxes, 33 states tax equity gains at the same rate as other forms of income. The remaining eight states make an exception for equity or capital gains and either tax just a portion of the gain or apply a lower rate. These eight states are Arkansas, Hawaii, Montana, New Mexico, North Dakota, South Carolina, Vermont and Wisconsin. If you live in one of these states, make sure you understand how to report your investment gains to end up paying the lower tax rate.
Zero Federal Income Tax
At the federal level, taxpayers in the lowest two income tax brackets pay 0 percent tax on long-term equity gains. For a married couple, these brackets cover a taxable income up to $72,500 in 2013. Someone who files as single can have taxable income up to $36,250 and pay nothing on capital gains. Depending on your state tax laws, if your income is below these levels, you could end up paying state taxes on your capital gains but nothing at the federal level.
Highest Combined Equity Taxes
At the other end of the spectrum are the states that have high tax rates and that also tax equity gains at the same rate as other income. According to Forbes magazine, for example, California residents pay among the highest rates on their capital gains of anyone in the world. In some states the top tax bracket is hit at a relatively low level of income, such as the 8.5 percent tax rate at $19,000 of income in Maine.
- ACCF: State and Federal Individual Capital Gains Tax Rates: How High Could They Go?
- Bankrate.com: No Capital Gains Due For Some Investors
- State.MN.us: Capital Gains Taxation: Federal and State
- Tax-brackets.org: State Income Tax Tables
- Forbes: Killing Golden Goose, California Taxes Capital Gains as Ordinary Income
- Creatas/Creatas/Getty Images
- How to Know If I Need to File State Taxes
- Can Georgia Charge Income Taxes on Income From Florida?
- List of States With No State Income Tax on Their Retirement Checks
- Your Money and Taxes
- What Is State Withholding Tax?
- Top 10 Low Tax States
- Do You Pay Taxes on Pensions From the State You Retired In or the State You're Living In?
- Taxable Wage Definition for Social Security Taxes