Why Your Actual Tax Bill May Be Higher Than You Expect
When investors discuss capital gains taxes, the conversation often centers on the federal long-term capital gains rates of 0%, 15%, or 20%.
While those rates are important, they don't tell the whole story.
Many investors are surprised to learn that their actual tax burden can be significantly higher once additional taxes are considered. Depending on income level and state of residence, the combined tax cost on an investment gain may exceed what many people expect.
For higher-income households, the federal long-term capital gains rate can reach 20%, with an additional 3.8% Net Investment Income Tax potentially applying as well.
State taxes can add another layer
For example, residents of New York and New Jersey generally pay state income tax on capital gains. When federal and state taxes are combined, the effective tax rate on investment gains can become substantially higher than the commonly cited 15% or 20% federal rates.
A New York City resident, as an example, faces an even higher combined rate of up to 38.58%, including 20% federal capital gains tax, 3.8% NIIT, up to 10.9% New York State income tax, and up to 3.876% New York City income tax."
This doesn't mean investors should avoid realizing gains when appropriate. Rather, it highlights the importance of tax-aware planning.
Understanding the tax consequences before selling appreciated assets may help investors make more informed decisions regarding timing, withdrawals, diversification, estate planning, and retirement income strategies.
The goal isn't simply to maximize returns—it's to maximize what you keep after taxes.
Here to Help
If you'd like to review the potential tax impact of your investment strategy or discuss ways to improve tax efficiency, I'd be happy to help.
Reach out today to schedule an appointment.
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