NCPA - National Center for Policy Analysis

The Other Capital Gains Tax

September 10, 2010

Should you rush to take long-term capital gains before January 1, when the top federal gains rate is set to rise from 15 percent to 20 percent?  That depends, of course, on many factors, including whether you'll need cash or want to liquidate a holding in the next few years anyway.  But investors often overlook another key variable: the state and local tax bite, says Forbes Magazine.

Here are some pointers, says Forbes:

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.  
  • For example, 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.

Watch your legislature.

  • Don't assume next year's state rate will be the same as this year's.
  • Consider:  This year Rhode Island taxed all gains at a top 9.9 percent rate; next year the top rate for all gains (and other income) will be 6 percent.

Consider your next move.

  • A plan to relocate to an income-tax-free state would be a strong reason to defer taking gains.
  • A Massachusetts resident, for example, could escape that state's 12 percent levy on gains on collectibles by selling after he retired to Florida.

Remember the big deferral.

  • If you die after December 31, 2010 holding appreciated assets, your heirs will likely get a "step-up" in the basis of those assets, escaping gains tax on any appreciation before your death.
  • If you're of a certain age and don't need the cash, hang on.

Source: Ashlea Ebeling, "The Other Capital Gains Tax," Forbes Magazine, September 13, 2010.

For text: 


Browse more articles on Tax and Spending Issues