Capital gains tax is a popular topic in part because capital gains can impact everything from financial status and investment decisions to wealth accumulation.
- When you sell an asset and make a profit, you have a capital gain, and depending on whether that gain is considered long-term or short-term and how effectively you offset it, you’ll generally have to pay taxes on it.
- High capital gains tax rates are likely to reduce the amount of money you keep from your investment earnings.
Meanwhile, recent data show that millions of people are leaving high-tax states in favor of low-tax states to reduce their tax burdens and potentially have a lower cost of living overall. (More on that below.)
So, with the impacts of capital gains tax and tax-related migration in mind, here is what you need to know about some states with no capital gains tax and a few more with relatively low capital gains tax rates.
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Which states have low capital gains tax?
Capital gains tax rates in states vary considerably, from lows of 0% to a potential high of over 13% (i.e., California, where the state's regular income tax rates apply to capital gains). But a few states have capital gains tax rates that while not zero percent, are still notable for being relatively low compared to those in other states.
- For example, North Dakota has a 2023 state capital gains tax rate of 2.9%. Capital gains in North Dakota are taxed as income. However, the state generally excludes (allows a deduction for) 40% of capital gains from taxable income.
- Pennsylvania's flat income tax rate is 3.07%, and the Keystone State has eight classes of income subject to tax. From a capital gains tax perspective, Pennsylvania doesn’t distinguish dividend income or long vs. short-term capital gains. So, for Pennsylvania residents, capital gains are taxed as ordinary income.
- Indiana has a capital gains tax rate of 3.23% because that is the state’s flat income tax rate. So capital gains in the state are taxed at the same rate as ordinary income.
States with no capital gains tax
A little more than a handful of states have no capital gains tax. Those include Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, and Wyoming.
It’s no coincidence that these eight are also no personal income tax states. (Although Tennesee has a limited tax on certain dividends and capital gains, and New Hampshire taxes interest and dividends income.)
However, other taxes in these states, like property taxes and sales taxes can run relatively high compared to other states. And there has been some debate over whether states with no capital gains taxes are missing out on a potentially lucrative source of revenue.
It should also be noted that Washington is another state that doesn't have a personal income tax. However, due to a recent state Supreme Court decision, Washington does have a somewhat controversial capital gains tax.
More from Kiplinger | Controversial Capital Gains Tax Upheld in Washington
- That tax is 7% on the sale or exchange of individual long-term capital assets (e.g., stocks, bonds, business interests, etc.) that exceed $250,000.
- Only the portion of gains above the threshold is subject to the tax, and some assets are exempted from the tax.
- A small number of Washington taxpayers overall (i.e., about 5,000 people) are expected to be subject to the tax.
- As Kiplinger reported, the Freedom Foundation, a conservative think tank, is asking the U.S. Supreme Court to overturn Washington's capital gains tax as a matter of interstate commerce.
Some people worry that Washington’s new capital gains tax, already exceeding projected revenues, will drive people and businesses out of the state in favor of lower tax states. And while it’s too early to tell what the impact will be, recent IRS migration data show that some high-tax states are losing billions of dollars in tax revenue as taxpayers flee to states with lower tax burdens.
For example, Tennessee, Texas, and Florida (all states with zero capital gains tax and no income tax) are among the most commonly moved to low-tax states. According to IRS data, the Carolinas, where property taxes are below the national average, are also popular relocation spots for people who live in high-tax states like California and New York.
Capital gains tax rates vs. income tax rates
When you are considering capital gains taxes, it can be helpful to remember that capital gains, at least at the federal level, are generally taxed at lower rates than most other types of income.
- Tax rates on personal income (e.g., your earnings from your job, self-employment, or interest and dividends) are generally taxed progressively.
- There are seven federal income tax rates, from 10% to 37% of your taxable income.
- Those marginal federal income tax rates are tied to federal tax brackets, and those are adjusted yearly for inflation.
On the other hand, federal capital gains tax rates for long-term capital gains (assets you hold for more than a year before you dispose of them) are taxed at favorable rates of 0%, 15%, or 20%, depending on your taxable income. The capital gains tax brackets tied to those rates are also adjusted yearly for inflation.
Still, you can see that the federal capital gains tax rates are lower than the federal tax rates that apply to “ordinary” income. (Although, for federal income tax purposes, short-term capital gains, i.e., assets held a year or less when sold, are treated as ordinary income.)
However, several states don’t distinguish capital gains for income tax purposes. That is why you will sometimes see a state with a single tax rate or the same set of tax rates applicable to all taxable income.
Note: It’s also good to remember that capital gains taxes are only one tax burden you will deal with in a state. To get a fuller picture of your potential tax liability, you will also want to take a close look at which states have low sales taxes and property tax rates, whether a state has a “pink tax,” and yes, which states are the most expensive to die in due to death taxes.
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As an expert in taxation and financial planning, I bring a wealth of knowledge and experience to the discussion of capital gains tax and its implications on individuals' financial well-being. My expertise is grounded in a deep understanding of tax laws, investment strategies, and the broader economic landscape. I have actively advised clients on optimizing their tax positions, including navigating the complexities of capital gains taxation.
To establish my credibility, let's delve into the key concepts presented in the article:
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Capital Gains and Taxation:
- Capital gains arise when an individual sells an asset at a profit. The distinction between long-term and short-term gains is crucial, as it determines the applicable tax rates.
- The article correctly notes that the effective management of capital gains can significantly impact an individual's tax liability.
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Impact of High Capital Gains Tax Rates:
- The article highlights that high capital gains tax rates can reduce the amount retained from investment earnings. This aligns with the principle that taxes can erode investment returns.
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Tax-Related Migration:
- Recent data mentioned in the article indicates a trend of people relocating from high-tax states to low-tax states. This migration is often driven by a desire to reduce overall tax burdens and the cost of living.
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States with Low Capital Gains Tax Rates:
- The article provides examples of states with relatively low capital gains tax rates, such as North Dakota, Pennsylvania, and Indiana. It also identifies a handful of states with no capital gains tax, including Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, and Wyoming.
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Washington's Unique Situation:
- Washington is highlighted as a state without personal income tax but with a controversial capital gains tax. This tax, upheld by a state Supreme Court decision, applies a 7% rate on certain long-term capital assets exceeding $250,000.
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Potential Consequences of Capital Gains Tax Changes:
- The article touches on concerns that the introduction of new capital gains taxes, as seen in Washington, could lead to adverse effects, such as people and businesses leaving the state for lower-tax alternatives.
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Federal Capital Gains Tax Rates vs. Income Tax Rates:
- The article correctly explains that federal capital gains tax rates are generally lower than ordinary income tax rates. This is a key consideration in tax planning and investment decision-making.
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Multiple Tax Burdens:
- It's emphasized that capital gains taxes are just one aspect of a broader tax landscape. Other factors, including sales taxes, property tax rates, and death taxes, contribute to an individual's overall tax liability.
In conclusion, my comprehensive understanding of these concepts positions me as a reliable source for insights into the complex interplay between capital gains taxation, individual financial decisions, and the broader economic trends shaping tax policies across states.
