Capital gains and state taxes?

[roadtripper]

I just got off the phone with a real estate tax state employee in Maine. We just sold a house there--not our primary residence--and they withheld taxes in anticipation of our having to pay capital gains. I had filled out a form to have the withholding reduced, but it's still about 14K.

The employee told me that they follow IRS guidelines for capital gains taxes. I told her that under IRS rules, our income is below the threshold where we would pay federal capital gains taxes. I pointed her to this language from IRS Topic 409:

"The tax rate on most net capital gain is no higher than 15% for most individuals. Some or all net capital gain may be taxed at 0% if your taxable income is less than or equal to $40,400 for single or $80,800 for married filing jointly or qualifying widow(er)."

She told me I am reading this wrong, and that the capital gains would be included in our income for the year, which would put us over this threshold. She said she had never heard of an income threshold before capital gains tax kicks in.

Now I am more confused than ever. Can anyone help please?

 

[N02L84ER]

There are taxable income thresholds for Federal income taxes. I do not know if Maine has these thresholds. Illinois does not, every dollar of capital gains is taxed in Illinois once you exceed your exemptions.
The capital gains are considered Federal taxable income. The tax may be 0% if the total taxable income is below the thresholds. HTH.

 

[obsessed]

Capital gains are included in your taxable income for federal taxes with ordinary income taxed first as you go up in the rate brackets.

For example, if you have $50,000 in ordinary income and $50,000 in capital gains after you subtract out deductions, you have a total of $100,000 in taxable income. Assuming MFJ, the $50k in ordinary income is taxed at the lowest brackets, then the next $30,800 of capital gains is taxed at 0% (amount of income below $80,800 threshold). The balance of $19,200 would be taxed at the 15% capital gains rate.

 

[Midpack]

I would think local realtors would know exactly how Federal and State of Maine capital gains on a second home are treated, maybe there’s another Maine resident here?

https://maineccre.com/the-tax-difference-in-second-homes/

 

[N02L84ER]

If you use Turbo Tax or another tax program and filed your Maine taxes with it, you could try pulling up a previous year's return, add the capital gains, and see how it would have affected that year's total tax.

 

[pb4uski]

I just got off the phone with a real estate tax state employee in Maine. We just sold a house there--not our primary residence--and they withheld taxes in anticipation of our having to pay capital gains. I had filled out a form to have the withholding reduced, but it's still about 14K.

The employee told me that they follow IRS guidelines for capital gains taxes. I told her that under IRS rules, our income is below the threshold where we would pay federal capital gains taxes. I pointed her to this language from IRS Topic 409:

"The tax rate on most net capital gain is no higher than 15% for most individuals. Some or all net capital gain may be taxed at 0% if your taxable income is less than or equal to $40,400 for single or $80,800 for married filing jointly or qualifying widow(er)."

She told me I am reading this wrong, and that the capital gains would be included in our income for the year, which would put us over this threshold. She said she had never heard of an income threshold before capital gains tax kicks in.

Now I am more confused than ever. Can anyone help please?

She doesn't understand how capital gains taxes work and that for most taxpayers there is a 0% rate and a 15% rate. Depending on your income, you might not incur captal gains taxes.

OTOH, the state doesn't have any way of knowing what your tax will be so the withholding is broad brush and if anything, intended to overstate what you might actually owe since if you owe less you can claim a refund for the difference. It is very common for taxes to be withheld from the proceeds from the sale of real estate as was done in your case. DD and DSIL sold land last year and it was done in their case and is very common, because if an out-of-state seller doesn't pay the tax as due then they don't have to chase them on it since they withheld it at the time of sale. In fact, they would be crazy not to withhold tax, particularly for out-of-state sellers.

You'll need to file a non-resident Maine tax return to calculate the tax due on the transaction and then if the tax is more than what was withheld you'll get a refund or if the tax is more than what was withheld then you'll owe them the difference.

I'm not sure how it works in Maine, but in Vermont you would calculate the tax as if you were a full-time Vermont resident, apportion your Vermont income (the gain on the land sale) and the tax would be the full-time resident tax divided by full-time resident income times Vermont income.

 

[SevenUp]

Most states, and it appears Maine is no exception, start with federal AGI and thus treat federal capital gains the same as ordinary income.

 

[roadtripper]

Thanks everyone. I appreciate the clarifications.