If you have cashed out capital gains, you know you’ll lose something to taxes. But how much? It’s important to understand your capital taxes and how they will impact your financial future, not least because that knowledge will empower you to take action to reduce your tax bill today.

In this article, we’ll explain what capital gains are and how they are taxed.

We’ll also show you different tax planning strategies that can significantly reduce your state capital gains tax:

• Sell appreciated assets in a tax-exempt trust through Charitable Remainder Trusts
• Buy renewable energy projects that make you eligible for significant government tax incentives that lower your capital gains tax bill. 
• Reduce your taxable income with charitable deduction tax strategies such as Charitable Lead Annuity Trusts and Conservation Easements.

So let’s dive in!

What Are Capital Gains? 

Capital gains are a capital asset’s increase in value from the value at which it was purchased. Capital assets can include stocks, real estate, or even an item purchased for personal use like a car or a boat – in short, any significant property that could gain or lose value over time.

Capital gains can be realized or unrealized. “Realized” in this context means “acquired” or “received,” so realized capital gains are gains that you have captured by selling the asset. Unrealized gains, by contrast, represent a change in the value of an investment that you have not yet sold. For instance, if you hold stock that increases in value, but you haven’t sold it yet, that is considered an unrealized capital gain. Critically for our purposes, in most cases you will not pay taxes until you cash out or “realize” the gains.

What Are The Types Of Capital Gains? 

There are two types of realized capital gains for taxation purposes:

• Short-term capital gains: These are gains from selling assets that you’ve held for one year or less. At the federal level, short-term capital gains are typically taxed at the same (high) rate as ordinary income.
• Long-term capital gains: These are gains from selling assets that you’ve held for more than one year. Generally, at the federal level, long-term capital gains receive more favorable tax treatment than short-term gains.

How Are Capital Gains Taxed?

Capital gains are not taxed until they are realized, meaning that even if your Apple stock has increased 50x from the day you invested, you won’t owe any capital gains taxes until you sell the stock. Of course, once you do sell the stock, you will face federal and state capital gains taxes. 

Realized capital gains are typically subject to both federal and state taxes. The tax rate you will pay on capital gains will vary depending on where you live, your income, and the type of asset you sold but the federal and state tax systems are generally progressive, so individuals with higher incomes face a higher capital gains tax rate. Let’s look at how federal and state governments tax capital gains. 

What Is The Federal Capital Gains Tax (2024)?

What Is The State Capital Gains Tax?

There are thirty-two states and the District of Columbia that impose state capital gains taxes, treating them as ordinary income for tax purposes. Among these, two states—Minnesota and Washington—apply higher rates on capital gains than on ordinary income.

In total, there are ten states that tax capital gains differently than ordinary income, with eight states applying lower rates on capital gains compared to ordinary income. 

Additionally, eight states do not tax capital gains at all, including Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming

Case Study

So, what would these numbers look like in the real world? 

Let’s consider Jenna, an Oklahoma investor who purchased 7,000 shares of Apple stock in April 2019 at $50 per share. She decides to sell her shares in January 2024 at a price of $100 each. Jenna held the stock for more than one year, so her realized income is considered long-term capital gain.

Jenna realized a capital gain of $350,000. (She paid for 7,000 shares at $50 each, for a total of $350,000, and then sold them for $100 each, for a total of $700,000. That’s a net gain of $350,000). 

Federal taxes

State taxes 

Jenna would also pay Oklahoma taxes on her capital gains. Given her $350,000 gains, she falls into the 4.75% tax bracket. Like the federal government, Oklahoma uses a progressive tax system, which means that different portions of the individual’s income are taxed at the different rates corresponding to the brackets they fall into.

• The first $1,000 of gains are taxed at 0.25% ($3)
• The next portion from $1,000 to $2,500 is taxed at 0.75% ($11)
• The next portion from $2,500 to $3,750 is taxed at 1.75% ($22)
• The next portion from $3,750 to $4,900 is taxed at 2.75% ($32)
• The next portion from $4,900 to $7,200 is taxed at 3.75% ($86)
• Finally, the remaining from $7,200 to $350,000 is taxed at 4.75% ($16,283)

Adding these amounts together, Jenna would pay a total of $16,437 in Oklahoma state capital gains taxes for 2024.

Short-term gains

A quick counterfactual: If Jenna had sold her stock after holding for less than a year, her earnings would have been considered short-term capital gains, and she would have been subject to ordinary income taxes at both the federal and Oklahoma levels. 

What Is Tax Planning?

Capital gain taxes are a common burden that can significantly reduce your net earnings from the sale of an asset. Accordingly, it’s critical to identify strategies that can reduce these taxes.

Tax planning is a strategic approach designed to reduce a person’s or a company’s capital gains tax liability by leveraging various tax benefits and allowances. It’s about understanding the tax implications of your financial decisions so you can minimize your taxes and, ultimately, keep more of your hard-earned money.

This might involve making investments that offer tax benefits, choosing the right type of retirement account, taking advantage of generally available deductions and credits, or creating a tax-advantaged trust or other vehicle.

4 Tax Planning Ideas To Reduce Capital Gains Taxes

There are many tax planning strategies that can help you reduce your federal and capital gains tax liability. Here are a few ideas:

• Sell appreciated assets in a tax-exempt trust: You can minimize your taxable capital gains by moving appreciated assets into a tax-exempt trust – a Charitable Remainder Trust, for example – before you sell. By setting up a CRUT trust, people can receive a charitable income tax deduction of approximately 10% of the current value of the appreciated asset and also save money in taxes when they sell it,  allowing them to reinvest those savings and create more wealth for themselves. As an example, if you have your assets in a lifetime CRUT, it’s common to be able to take home 100% or more compared to not using one and selling your assets in a regular taxable account, even after making a large donation to charity. Learn more about Charitable Remainder Trusts here or set up a call with us here. 
• Buying renewable energy projects: Investing in renewable energy projects can make you eligible for significant government tax incentives – credits and depreciation – to lower your capital gains taxes. Taking into account tax savings and income from the solar business, this strategy can make a 5.85x return on investment compared to choosing to pay your taxes directly instead. Learn more about renewable energy credits here or set up a call with us here to learn more.
• Maximize retirement contributions: Both federal and state state tax laws allow deductions for contributions to certain retirement accounts like a 401(k) or an IRA. Maxing out these contributions can lower your taxes, including ordinary income and capital gains taxes.
• Other charitable deductions:
  • Charitable Lead Annuity Trust: If you are charitably inclined, a Charitable Lead Annuity Trust (CLAT) might be an option to increase your charitable deductions this year and minimize your tax liability. As an example, if you have your money in a CLAT, you’ll be able to take home up to or more than 28% compared to not using one and paying your taxes upfront and reinvesting the remainder in a regular taxable account, even after making a large donation to charity.  
  • Conservation Easements: There’s also a not so openly discussed strategy: investing in conservation easements. When you agree to restrict the use of your land to the conservation cause, the government considers that a charitable donation, and you’ll get certain associated deductions. Your tax savings can often be around 2.5X your purchase price (assuming a 50% tax rate). You can learn more about conservation easements here or set up a call with us here to learn more.

Conclusion

Capital gain taxes can significantly reduce the wealth your family keeps every year. Fortunately, there are several strategies available to minimize these taxes. Read more here and check out our Guided Planner tool, where we’ll point you toward the strategies that might apply to you.

About Valur

We’ve built a platform to give everyone access to the tax and wealth-building tools typically reserved for wealthy individuals with a team of accountants and lawyers. We make it simple and seamless for our customers to take advantage of these hard-to-access tax-advantaged structures. With Valur, you can build your wealth more efficiently at less than half the cost of competitors. 

From picking the best strategy to taking care of all the setup and ongoing overhead, we make things simple. The results are real: We have helped create more than $3 billion in additional wealth for our customers. If you would like to learn more, please feel free to explore our Learning Center. You can also see your potential tax savings with our online calculators or schedule a time to chat with us!