Does Illinois Have a Capital Gains Tax?

Capital gains taxes must be monitored and paid for federal and Illinois state tax returns. Although much of your overall tax burden is federal income and capital gains taxes, states set their own rates and terms. Illinois capital gains tax rates are the same as the state tax, which is a flat rate of 4.95% regardless of income or filing status. Let’s explore when capital gains taxes apply and how to correctly account for them in your Illinois tax return.

Where Do Capital Gains Taxes Apply?

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Capital gains taxes apply to assets, such as stocks, when they’re sold. As with other investments, profits from selling stocks that have appreciated in value are taxable.

Exclusions for capital gains taxes are written into the tax code and include exemptions from taxes on the sale of primary residences. Primary residence sales typically allow homeowners to exclude up to $250,000 of gains for single filers and $500,000 for married couples filing jointly. The property must have been a primary residence for at least two of the past five years.

Capital gains taxes also apply to properties other than primary residences. Determining the tax burden for real estate can be complex because the cost basis includes the sale price, closing costs, legal fees, and renovations. After the sale, net proceeds are determined by deducting sales costs, such as advertising, staging, commissions, legal fees, and title transfer taxes. Losses from real estate and other investments may offset capital gains taxes.

How Do Short-Term Capital Gains Taxes Work?

Short-term capital gains apply to assets held for less than one year. When stocks are sold after a short-term purchase, profits are subject to a short-term capital gains tax. Short-term holdings are taxed as ordinary income at the same rate as wages, tips, and commissions from jobs.

Long-term capital gains and qualified dividends are taxed differently and typically offer sellers a more favorable rate than short-term capital gains.

How Do I Minimize My Capital Gains Tax Burden?

You can minimize your tax burden by holding onto assets for more than one year. You’ll pay less because long-term capital gains tax rates are lower than short-term rates, which are typically the same as regular income tax rates. Taxpayers can follow other strategies to eliminate or minimize capital gains taxes using different approaches based on long-term financial goals. A tax professional can help you find ways to reduce your tax burden from capital gains. Planning for potential liability from anticipated growth will help you determine how to make financial transactions work for you.

For stock transactions, it’s possible to limit capital gains taxes by taking a few steps to avoid negatively affecting your investment profits:

• Focus on holding assets for at least one year to take advantage of lower long-term capital gains tax rates.
• Use tax-advantaged accounts, such as a 401(k) or traditional IRA, which eliminate capital gains taxes when buying or selling assets, such as stocks and bonds. Tax-advantaged accounts can be a combination of pre-tax, tax-deferred, and after-tax. Pre-tax accounts, such as regular 401(k) accounts, are taxed upon withdrawal after retirement. Eligible withdrawals from after-tax investment accounts, such as Roth IRAs, or contributions to 401(k)s after taxes are not taxed.
• Sell assets at a lower tax bracket, such as post-retirement. Capital gains rates at the federal level are at a 0% bracket for those with lower income. Strategically withdrawing money from a balance of traditional IRAs, 401(k) accounts, and Roth IRAs can keep you in a more desirable tax bracket. Maximizing retirement and health savings account contributions can lower taxable income for those still working.
• Choose the cost basis, if possible, when selling stock, prioritizing selling individual shares that are sold at a loss or have lower gains than other shares.
• Use losses to offset short-term and long-term capital gains. Strategically using losses can save on capital gains taxes and ordinary income.
• Donate stock, which provides a tax deduction of the current value and eliminates capital gains taxes on donated shares.
• Move to a state without capital gains taxes or more favorable rates to reduce the burden.
• Pass appreciated assets to family members because heirs won’t owe capital gains on assets if they sell them upon transfer. Only appreciation after the original investor’s death is used to determine taxes.

Are Capital Gains Tax Laws Subject To Change?

Capital gains taxes are a political concern and debated across the nation. Rates and other terms may be altered at the federal or state levels in upcoming years. Rely on tax experts, who monitor changes and proposed changes that may affect your bottom line.

What Are Capital Gains Rates for Illinois Residents?

Illinois residents must declare capital gains on state and federal tax returns. Capital gains are taxed at state, federal, and sometimes local levels. Illinois’s top average combined rate is 27.2% when state, federal, and local taxes are added together.

State

Long-term and short-term capital gains tax rates in Illinois are both taxed at 4.95%, which is the same as the state income tax rate. Illinois taxpayers with an adjusted gross income of more than $250,000 for single filers or $500,000 for joint filers can’t claim a personal exemption. In addition to state taxes, local capital gains taxes may apply.

Federal

Federal rates for short-term capital gains match regular income tax rates, ranging from 10% to 37% based on income brackets. Federal long-term capital gains tax rates have three brackets, ranging from 0% to 20% based on income levels for single filers, married filing jointly, married filing separately, or head of household. Most filers will pay 15%, which applies to incomes varying from about $42,000 to roughly $500,000, depending on filing status.

In addition to state and federal capital gains taxes, those with modified adjusted gross income over $200,000, or $250,000 for married filing jointly, are subject to a 3.8% net investment income tax.

Our Team Can Help

Our financial planning and consulting experts at Pasquesi Sheppard are ready to help you minimize your capital gains tax burden by helping you make long-term financial decisions. We’ll help you with key services, including tax planning, tax preparation, estate planning, and accounting. If you have questions about capital gains taxes, please contact us. We’ll be happy to ensure you take the proper steps to allow you to minimize your tax burden when it comes to capital gains.