Capital Gain Comparison
The capital gain tax on appreciation in value goes up from 15% to 20% when “Taxable Income” exceeds $492,301 (single) or $553,851 (married filing jointly). (2023 amounts)
The Net Investment Income (NII) tax is applicable when the Taxpayer’s “Adjusted Gross Income” exceeds $200,000 for a single Taxpayer or $250,000 for married Taxpayers filing jointly. Read more on if this applies to you here.
See a more in-depth analysis of a 1031 Exchange vs taxable sale.
How High Are your State Income Tax Rates?
Forty-three states in the U.S. impose individual income taxes. Of these, forty-one states tax income from wages and salaries. However, New Hampshire only taxes income from dividends and interest, while Washington State only taxes income from capital gains. Meanwhile, seven states do not impose any individual income tax.
States that tax wages have different tax structures. Eleven states use a single-rate tax system, where the same rate applies to all taxable income. On the other hand, 30 states and the District of Columbia have graduated-rate income tax systems, where tax rates increase as income increases. The number of tax brackets varies widely among these states. For example, Kansas has a three-bracket system, while Hawaii has 12 brackets. The top marginal tax rates range from 2.5 percent in Arizona to 13.3 percent in California.
In some states, several tax brackets are concentrated within a narrow income range. For instance, in Georgia, taxpayers reach the state’s highest, sixth bracket at only $7,000 in taxable income. In contrast, in other states, the highest tax rate applies only to higher levels of income. In California, Massachusetts, New Jersey, New York, and the District of Columbia, for instance, the top tax rate starts at or above $1 million, including California’s “millionaire’s tax” surcharge.
Does the NII (Net Investment Income Tax – Affordable Care Act) Apply to You?
Starting January 1, 2013, individuals with investment income might be required to pay a Net Investment Income Tax (NIIT). The tax rate is 3.8%, applied to either their net investment income or the excess of their modified adjusted gross income over the set threshold based on their filing status – whichever is lower.
Here are the statutory threshold amounts based on filing status:
- Married filing jointly – $250,000
- Married filing separately – $125,000
- Single or head of household – $200,000
- Qualifying widow(er) with a child – $250,000
Net investment income typically encompasses items like interest, dividends, capital gains, rental and royalty income, and non-qualified annuities. However, it generally does not cover wages, unemployment compensation, Social Security Benefits, alimony, and most self-employment income.
Importantly, net investment income does not account for any gains from selling a personal residence that are exempt from gross income for standard income tax purposes. Any gains excluded from gross income for regular tax purposes are not subject to NIIT.
To report and pay the NIIT, individuals need to fill out Form 8960. Instructions for Form 8960 offer guidance on calculating the amount of investment income subject to the tax.
Please note, individuals who do not withhold or make sufficient quarterly estimated tax payments, including NIIT, may be liable for an estimated tax penalty.