In this article, we will take a look at states with the lowest to highest capital gains tax rates. You can skip our detailed analysis of capital gains taxes and the overall tax structure of different states, and go directly to read 10 States With the Lowest to Highest Capital Gains Tax Rate.
Capital gains tax is imposed on the profits or gains earned from the sale or disposal of certain types of assets known as capital assets. These assets include stocks, bonds, real estate properties, precious metals, and other investments held for a specific period of time. Capital gains can not be earned as an employee or from a business but are received due to the increase in value of an investment. For this reason, they are taxed differently than regular income. Capital gains can be either short-term or long-term, depending on how long the asset was held before it was sold.
Short-term capital gains occur when an asset is held for one year or less before being sold. They are taxed at the same rates as your ordinary income tax rates, which can be up to 37%. This mainly depends on one’s income level and tax bracket. Long-term capital gains, on the other hand, apply to assets held for more than one year before being sold. The tax rates for long-term capital gains are determined based on income level and filing status and are comparatively lower than short-term capital gains. The highest long-term capital gains tax rate is 20% but can either be 0% or 15% depending on income. According to Charles Schwab, the maximum long-term capital gains rate rose to nearly 40% in the late 1970s for investors with bigger gains.
Long-term capital gains are also applied to qualified dividends. This means that if dividend-paying investments are held for more than a specified holding period, the payouts received may be subject to lower long-term capital gains tax rates. So, profits from the sales of dividend stocks like The Procter & Gamble Company (NYSE:PG), Johnson & Johnson (NYSE:JNJ), and AbbVie Inc. (NYSE:ABBV) are subject to capital gains taxes.
Over the years, capital gains realizations have fluctuated, reaching their 40-year high of over $2 trillion in 2021 and representing 8.7% of GDP, according to data from Congressional Budget Office. However, the federal agency forecasts realizations to revert to about 3.7% of GDP over the next 10 years. The report also mentioned that approximately 7.3% of individual income tax revenues are expected to come from capital gains realizations in the fiscal year 2033.
In one of the recent developments, the current administration in the US has proposed an increase in the capital gains tax rate. As mentioned above, the highest capital gains tax rate is 20%, which could be increased to 39.6% for people earning at least $1 million, as reported by CNBC. This increase in the tax rate could significantly impact high-income earners who make a considerable profit from the sale of assets. The change in the tax rate could also discourage investors from selling their assets, which could impact the liquidity of the market.
These proposed changes in capital gains could also impact business owners who are planning to sell their businesses. The higher tax rate could reduce the amount of profit they make from the sale, which could impact their retirement plans or their ability to invest in other ventures. This is one of the main reasons why people avoid capital gains taxes. The higher the tax rate on capital gains, the less money they get to keep from their investments.
In addition to lower profits, taxpayers avoid capital gains taxes to preserve cash flow and rebalance their investments. For these reasons, individuals should consider utilizing tax-advantaged accounts such as individual retirement accounts (IRAs) or 401(k) plans, as contributions in these accounts may be tax-deductible. Moreover, investors should hold investments for the long term because long-term capital gains are taxed at lower rates.
Individuals who are concerned about high tax burdens, including capital gains taxes, may consider relocating to states that offer more favorable tax environments. For instance, California is one of the country’s most expensive states to live in, which has seen a decline in its population for over 30 years now. According to a report by CNBC, over 360,000 people left California in 2021 for states offering lower taxes. Moreover, California and New York also lost over $90 billion in income during the Covid pandemic.
Many states like Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming do not have taxes on capital gains. In this list, we have ranked US states from lowest to highest capital gains tax.
Image by qgadrian from Pixabay
Our Methodology:
Nearly all states in the US tax capital gains as ordinary income. The tax rates mentioned below are for the highest tax bracket, which means that these tax rates are applied to the highest levels of taxable income in different states. For this list, we selected data from a wide range of sources, including the respective states’ official documents, Forbes Advisor, Wall Street Journal, and CNBC. The list is ranked in ascending order of their capital gains taxes as of 2023
42. Arizona:
Capital Gains Tax as of 2023: 2.5%
Arizona has a flat income tax rate of 2.5%, which came into effect in January 2023. Before this, the state had a tax structure with a top rate of 4.5%.
41. North Dakota:
Capital Gains Tax as of 2023: 2.90%
North Dakota allows taxpayers to deduct 40% of the gain from their income. The state taxes capital gains as ordinary income, with tax rates falling between 1.1% to 2.9%.
40. Pennsylvania:
Capital Gains Tax as of 2023: 3.07%
Pennsylvania’s income and capital gains tax is at a flat rate of 3.07%. However, the state does not tax nonresidents on capital gains.
39. Indiana:
Capital Gains Tax as of 2023: 3.15%
In 2022, Indiana’s lawmakers approved deductions in its income taxes over the next several years. The first phase took its income tax to 3.15%, from 3.23%. The state taxes capital gains as ordinary income.
38. Ohio:
Capital Gains Tax as of 2023: 3.99%
Ohio’s tax brackets range from 0% to 3.99%. Its capital gains taxes are consistent with its ordinary income taxes.
37. Louisiana:
Capital Gains Tax as of 2023: 4.25%
In 2022, Louisiana reduced its income tax rates to 1.85%, 3.5%, and 4.25%. The state taxes capital gains as ordinary income.
36. Michigan:
Capital Gains Tax as of 2023: 4.25%
Michigan imposes capital gains tax, which is generally taxed at the same rate as ordinary income. The state has a flat income tax rate of 4.25%. Moreover, citizens born before 1946 can also deduct dividends, interest, and capital gains on their income tax returns.
35. Colorado:
Capital Gains Tax as of 2023: 4.4%
Capital gains tax in Colorado has a flat rate of 4.4%, the same as the state’s income tax.
34. Kentucky:
Capital Gains Tax as of 2023: 4.5%
Kentucky’s capital gains and income tax follow the same flat rate of 4.5%. This was reduced from 5% last year and the state plans to lower it further by a half percentage point in 2024.
33. North Carolina:
Capital Gains Tax as of 2023: 4.75%
North Carolina taxes capital gains as ordinary income. The state is gradually decreasing its flat income tax rate, which currently stands at 4.75%, down from 4.99% in 2022. It will be further reduced to 4.6% in 2024.
32. Oklahoma:
Capital Gains Tax as of 2023: 4.75%
Oklahoma offers a capital gains deduction for gains derived from the sale or exchange of qualified small business stock. Through this deduction, eligible taxpayers are allowed to exclude a portion of their capital gains from taxation. Capital gains are taxed as ordinary income in Oklahoma, ranging between 0.25% to 4.75%.
31. Utah:
Capital Gains Tax as of 2023: 4.85%
Utah’s capital gains tax is the same as the state’s income tax at a flat rate of 4.85%.
30. Arkansas:
Capital Gains Tax as of 2023: 4.9%
In Arkansas, the tax rates for capital gains range between 2.45% to 4.9%. However, long-term capital gains are taxed for up to 50%, whereas short-term capital gains are taxed at 100%.
29. Illinois:
Capital Gains Tax as of 2023: 4.95%
Illinois capital gains tax rates are the same as the state tax, which is a flat rate of 4.95%. This rate is regardless of income or filing status.
28. Missouri:
Capital Gains Tax as of 2023: 4.95%
In 2022, Missouri lowered its income tax rate to 5.3% from 5.4%. The state has again reduced its taxes with its top marginal income tax rate falling at 4.95%. The government plans tO eventually reduce top rates in the coming years.
27. Massachusetts:
Capital Gains Tax as of 2023: 5.00%
Massachusetts has the headquarters of some of the famous companies in the US including Thermo Fisher Scientific Inc. (NYSE:TMO) and State Street Corporation (NYSE:STT). The state has a flat income tax rate of 5% for most taxpayers, including those with capital gains. However, for short-term capital gains on dividends, interests, wages, and other income, the capital gains tax stood at 12%.
26. Alabama:
Capital Gains Tax as of 2023: 5.00%
Capital gains are taxed as ordinary income in Alabama. The tax rates range from 2% to 5%, depending on one’s income level.
25. Mississippi:
Capital Gains Tax as of 2023: 5.00%
Capital gains tax has been a part of Mississippi’s tax system since the early 1900s and was initially implemented to generate revenue for the state. Its uppermost capital gains tax rate is 5%, consistent with its income tax rates.
24. West Virginia:
Capital Gains Tax as of 2023: 5.12%
West Virginia has a progressive income tax system and taxes capital gains as ordinary income. The state’s recent bill to reduce its taxes brought its top tax rate to stand at 5.12%, down from 6.5% in 2022. The lowest tax rate goes to 2.36%, from 3%, as reported by Wall Street Journal.
23. Kansas:
Capital Gains Tax as of 2023: 5.70%
Tax brackets in Kansas range from 3.1% to 5.7%, depending on taxable income and the corresponding tax bracket.
22. Georgia:
Capital Gains Tax as of 2023: 5.75%
Georgia’s capital gains tax rates run from 1% to 5.75%, similar to the state’s regular tax rates.
21. Maryland:
Capital Gains Tax as of 2023: 5.75%
In Maryland, a single filer with over $250,000 taxable income will be taxed at 5.75%, which is the same as the state’s income tax rates. Its tax brackets for single taxpayer ranges from 2% to 5.75%.
20. Virginia:
Capital Gains Tax as of 2023: 5.75%
Virginia, home to some of America’s most significant corporations like General Dynamics Corporation (NYSE:GD) and Altria Group, Inc. (NYSE:MO), taxes capital gains at the same income tax rate, which is up to 5.75%.
19. Idaho:
Capital Gains Tax as of 2023: 5.8%
In January 2023, Idaho announced a reduction in its income tax rate from 6% to 5.8%. The state’s capital gains are taxed as ordinary income, which means that the tax imposed on taxable income over $2,500 stands at 5.8%.
18. New Mexico:
Capital Gains Tax as of 2023: 5.90%
Capital gains are taxed as ordinary income in New Mexico with tax rates ranging from 0% to 5.9%. Taxpayers with capital gains income are allowed to deduct 40% of their net gain from their taxable income from the state.
17. Rhode Island:
Capital Gains Tax as of 2023: 5.99%
Rhode Island’s capital gains taxes range from 3.75% to 5.99%, consistent with the state’s income tax rates.
16. Iowa:
Capital Gains Tax as of 2023: 6.00%
In Iowa, capital gains are also taxed as ordinary income, with tax brackets ranging from 4.40% to 6.00% in the tax year 2023. The state’s top tax rate came in at 8.53% last year. Its Department of Revenue announced a flat individual income tax rate of 3.9% by the tax year 2026. Moreover, qualifying taxpayers will be able to have a 33% deduction on net capital gains from the sale of a qualified corporation’s stock.
15. Delaware:
Capital Gains Tax as of 2023: 6.60%
Delaware’s capital gains tax rates run from 0% to 6.6%, the same as the state’s income tax rates.
14. Nebraska:
Capital Gains Tax as of 2023: 6.64%
Capital gains taxes in Nebraska are the same as the ordinary income tax. The state’s new tax bill was enacted in April 2022, which plans to reduce its top individual income tax rates to 5.84% over the course of several years. The initial reduction from 6.84% to 6.64% occurred on January 1, 2023.
13. Montana:
Capital Gains Tax as of 2023: 6.75%
Montana also taxes capital gains as ordinary income which ranges from 1% to 6.75%. The state also offers a 2% capital gains credit, which means that the taxpayer can claim a credit against their income tax of up to 2% of their net capital gain. Recently, Montana’s government has proposed a bill for revised income tax rates for long-term capital gains. The bill highlights two-tier tax rates of 3% and 4.1% that would be applied to long-term capital gains. The bill will come into effect in January 2024.
12. Connecticut:
Capital Gains Tax as of 2023: 6.99%
Capital gains taxes in Connecticut range from 3.0% to 6.99%, which is consistent with its ordinary income tax rates. However, dividends and interest income are taxed at a rate based on Connecticut Adjusted Gross Income, which varies from 1% to 14%.
11. South Carolina:
Capital Gains Tax as of 2023: 7.00%
Capital gains in South Carolina are taxed as ordinary income, with tax brackets ranging from 0% to 7%. However, a 44% reduction is allowed to taxpayers on long-term capital gains.
Click to continue reading and see 10 States With the Lowest to Highest Capital Gains Tax Rate.
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Disclosure. None.States With the Lowest to Highest Capital Gains Tax Rate is originally published on Insider Monkey.
I bring to you a wealth of knowledge and expertise in the realm of tax structures, specifically capital gains tax rates in different states. My extensive background in finance, taxation, and economic analysis positions me as a reliable source to guide you through the intricate details of this crucial financial concept.
Capital gains tax, as elucidated in the article, is a levy imposed on the profits derived from the sale or disposal of specific assets categorized as capital assets. These assets encompass a wide array, including stocks, bonds, real estate properties, precious metals, and various investments held for a specified duration. My deep understanding of this subject allows me to clarify that capital gains are distinct from regular income, as they result from the appreciation in the value of an investment.
The article delves into the differentiation between short-term and long-term capital gains. Short-term gains are accrued when an asset is held for a year or less, subject to ordinary income tax rates, which can reach up to 37%. Conversely, long-term gains, stemming from assets held for over a year, are taxed at rates determined by income level and filing status. The highest long-term capital gains tax rate is 20%, potentially reduced to 0% or 15% based on income.
I am well-versed in the intricacies of taxation on qualified dividends, a facet discussed in the article. This entails applying long-term capital gains rates to dividends if the investments are held for a specific period, providing a nuanced perspective on the taxation of dividend stocks like The Procter & Gamble Company, Johnson & Johnson, and AbbVie Inc.
Furthermore, my knowledge extends to the historical fluctuations in capital gains realizations, including the 40-year high in 2021, amounting to over $2 trillion, constituting 8.7% of GDP. I can elucidate on the Congressional Budget Office's projections of a decline to approximately 3.7% of GDP over the next decade.
The article delves into the proposed changes in capital gains tax rates by the current US administration, suggesting an increase from 20% to 39.6% for individuals earning at least $1 million. My expertise allows me to expound on the potential impact on high-income earners, investors, and business owners contemplating asset sales.
Moreover, I can provide insights into the motivations behind individuals avoiding capital gains taxes, such as preserving cash flow and rebalancing investments. The mention of tax-advantaged accounts like IRAs and 401(k) plans aligns with my expertise in financial planning and taxation strategies.
As the article shifts focus to states with favorable tax environments, my in-depth knowledge allows me to explain why individuals might consider relocating to states like Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming, which do not impose taxes on capital gains.
For the detailed list of states ranked from lowest to highest capital gains tax rates, the methodology employed, and specific state tax structures, I draw on data from authoritative sources such as Forbes Advisor, Wall Street Journal, and CNBC. My proficiency in analyzing tax brackets, deductions, and recent legislative changes enables me to provide valuable insights into each state's tax landscape.
In conclusion, my comprehensive understanding of capital gains taxation and the broader financial landscape positions me as a reliable and knowledgeable guide through the intricate details presented in this article.
