Last Updated on April 23, 2024
If you have cashed out capital gains in Massachusetts, 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, how they are taxed in Massachusetts.
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 Easem*nts.
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.
Need some help to understand the most convenient tax planning structure to reduce your capital gains taxes? Our team of tax-planning experts can help!
What Is The Federal Capital Gains Tax (2024)?
Short- and long-term capital gains are taxed differently; assets held for one year or less are treated as ordinary income, while longer-held assets are taxed at lower rates.
The short-term capital gains schedule matches the schedule for ordinary income, and your marginal and effective rates depend on your income and marital status, as shown below:
| Taxable income (Single Filers) | Taxable income (Married Filing Jointly) | Tax Rate on This Capital Gain |
|---|---|---|
| $0 to $11,600 | $0 to $23,200 | 10% |
| $11,600 to $47,150 | $23,200 to $94,300 | 12% |
| $47,150 to $100,525 | $94,300 to $201,050 | 22% |
| $100,525 to $191,950 | $201,050 to $383,900 | 24% |
| $191,950 to $243,725 | $383,900 to $487,450 | 32% |
| $243,725 to $609,350 | $487,450 to $731,200 | 35% |
| $609,350 or more | $731,200 or more | 37% |
Long-term capital gains, meanwhile, are taxed at a lower rate than ordinary income. Here, too, the precise rate depends on the individual’s income and marital status:
| Taxable income (Single Filers) | Taxable income (Married Filing Jointly) | Tax Rate on This Capital Gain |
|---|---|---|
| $0 to $47,025 | $0 to $94,050 | 0% |
| $47,025 – $518,900 | $94,050 – $583,750 | 15% |
| $518,900 or more | $583,750 or more | 20% |
In addition, some categories of capital assets fall entirely outside of this rubric: gains on collectibles such as art, jewelry, antiques, and stamp collections are taxed up to a maximum 28% rate.
Short- and long-term capital gains are taxed differently; assets held for one year or less are treated as ordinary income, while longer-held assets are taxed at lower rates.
The short-term capital gains schedule matches the schedule for ordinary income, and your marginal and effective rates depend on your income and marital status, as shown below:
| Taxable income (Single Filers) | Taxable income (Married Filing Jointly) | Tax Rate on This Capital Gain |
|---|---|---|
| $0 to $11,600 | $0 to $23,200 | 10% |
| $11,600 to $47,150 | $23,200 to $94,300 | 12% |
| $47,150 to $100,525 | $94,300 to $201,050 | 22% |
| $100,525 to $191,950 | $201,050 to $383,900 | 24% |
| $191,950 to $243,725 | $383,900 to $487,450 | 32% |
| $243,725 to $609,350 | $487,450 to $731,200 | 35% |
| $609,350 or more | $731,200 or more | 37% |
Long-term capital gains, meanwhile, are taxed at a lower rate than ordinary income. Here, too, the precise rate depends on the individual’s income and marital status:
| Taxable income (Single Filers) | Taxable income (Married Filing Jointly) | Tax Rate on This Capital Gain |
|---|---|---|
| $0 to $47,025 | $0 to $94,050 | 0% |
| $47,025 – $518,900 | $94,050 – $583,750 | 15% |
| $518,900 or more | $583,750 or more | 20% |
In addition, some categories of capital assets fall entirely outside of this rubric: gains on collectibles such as art, jewelry, antiques, and stamp collections are taxed up to a maximum 28% rate.
What Is The Massachusetts Capital Gains Tax?
Capital gains in Massachusetts are taxed at one of two rates. Most long-term capital gains, are taxed at a tax rate of 5.00%. Short-term capital gains, which are realized in less than a year, are taxed at a rate of 12%, as are long-term gains on the sales of collectibles.
Case Study
So, what would these numbers look like in the real world?
Let’s consider Jenna, a Massachusetts 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
To simplify this example, let’s assume further that she doesn’t earn any other income. (If she did, it would be more complicated to figure out which bracket she falls into.) Given her $350,000 of gains, she would fall into the income group between $47,025 and $518,900, resulting in a long-term federal capital gains tax rate of 15%. As a result of the progressive tax system, however, not every dollar will be taxed at that rate. The amount below $47,025 won’t be taxed, so she would therefore pay $45,446 in federal capital gains taxes on this transaction (15% of every dollar over $47,025).
State taxes
Jenna would also pay Massachusetts taxes on her capital gains. Given her $350,000 realized income, she falls into the 5% tax bracket, so she would pay a total of $17.500 in Massachusetts state income taxes for 2024.
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 Massachusetts Capital Gains Taxes
There are many tax planning strategies that can help you reduce your federal and Massachusetts 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 Massachusetts 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 Easem*nts: There’s also a not so openly discussed strategy: investing in conservation easem*nts. 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 easem*nts 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.
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