When you sell an asset, such as stock shares or real estate, you have a capital gain or loss. The Internal Revenue Service wants to know about the transaction and will ask for a mandatory contribution to the U.S. Treasury based on the amount of your net profit, if any. The states have their own rules concerning capital gains, with some California taxpayers chipping in at the country's highest rate.
Income Taxes in the Golden State
California's progressive income tax levies at a higher rate for those earning a higher income. The rates range from 1 percent for those earning $7,749 or less to 12.3 percent for incomes above $519,688. In addition, a 1 percent surcharge, known as the Mental Health Services Tax, applies to incomes above $1 million. Capital gains are taxed as ordinary income, so these rates also apply to any gain on the sale of personal or investment property.
Adding the Federal Tax
For federal tax purposes, the IRS handles capital gains differently. There's a 15 percent rate for long-term gains on property held more than a year, while short-term gains for shorter-term investments are taxed at the same rate as regular income, as in California. High-income taxpayers -- those in the 39.6 percent federal tax bracket -- pay a 20 percent long-term capital gains rate at the federal level, plus a 3.8 percent tax in support of the Affordable Care Act. That means a taxpayer at the highest federal tax bracket could pay as much as 37.1 percent -- 23.8 percent federal plus 13.3 percent state -- on a long-term capital gain in California.
Federal vs. California Capital Gains
California residents with a federal capital gain or loss to report and who claim a different treatment by California law use Form 540. While both the IRS and California provide for a $500,000 exclusion for married, joint filers on the gain from the sale of a personal residence, for example, California offers Peace Corps volunteers a reduction in the time they must inhabit the residence to claim the exclusion.
- Forbes: U.S. Tax Rates? Not Competitive, But California's Are Worse
- Tax Foundation: How High Are Capital Gains Tax Rates in Your State?
- State of California Franchise Tax Board: 2014 California Tax Rates and Exemptions
- California Franchise Tax Board: Supplemental Guidelines to California Adjustments
- Bloomberg BNA: View From Morgan Lewis: The 2013 Capital Gains Tax Increase Highlights the Importance of Considering an ESOP Sale