Determining one's capital gains tax can be simple for California residents, but it can also become complicated for certain kinds of assets. You need to have held on to an asset for at least a year or more or it will be categorized as a short-term capital gain and be taxed at the same rate as regular income. One should also remain mindful of the fact that, for high-income earners, the Golden State has the highest rate at 13.3 percent.
What this translates into for a high-income earner is paying a combination of state and federal long-term capital gains taxes that can hit a total rate of 33.3 percent. Don't forget to add the 3.8 percent Medicare tax to that figure. Add it all up and you can easily see how important it is to engage in some careful and knowledgeable tax planning.
One way to escape paying long-term capital gains taxes is by not selling your investments. This tactic is, however, not the most reasonable strategy for most investors unless, of course, you sell your investments at a loss and they become a tax-reducing capital gains loss. Famous investor Warren Buffet has said that his preferred investment holding period is forever, but that's Warren Buffet talking and not someone who may have a somewhat lesser degree of certainty that their holdings will consistently increase in value.
If your holdings were received as an inheritance or as a gift, the tax calculation rules can get a bit more complicated. When things do get complicated, it pays to explore all of the available options and strategies and think ahead. In a state like California where the capital gains tax is highest, wise investors and anyone concerned for their future can benefit from competent outside advice from those who are best equipped to deal with the labyrinth of federal and state tax rules and regulations.
Source: The Motley Fool, "Long-Term Capital Gains and Tax Rates in 2013," Dan Dzombak, June 19, 2013