State Tax Snapshot: Apple Dividend Shines Spotlight on Federal, State Capital Gains Treatment

Apple’s March 19 announcement that it will be paying out over $45 billion to stockholders over the next three years was welcomed by investors. It also highlighted the current uncertainty over the federal tax treatment of capital gains and raised the issue of how the states are likely to tax the dividends.

Nearly all the states tax capital gains at the same rate as ordinary income. But some jurisdictions offer deductions, exclusions, or credits related to such income.

Current federal tax policy has dividends taxed at the same 15 percent maximum tax rate as capital gains, but that is set to change at the end of the year as current law reverts to the pre-2003 policy of taxing dividends at ordinary income tax rates, Bloomberg BNA’s Brett Ferguson explained in a March 24 Daily Tax Report article. If all of the 2001 and 2003 tax cuts are allowed to expire, that would make the top dividends tax rate 43.4 percent after the new 3.8 percent surtax on unearned income is also taken into account, he explained.

Analysts say this is unlikely to happen, but uncertainty exists over whether dividends will be decoupled from capital gains treatment as proposed by President Obama in February, Ferguson notes.

The federal tax rate applied to capital gains is unlikely to have an immediate impact at the state level because each jurisdiction adopts its own rates. It is also unclear whether any states that provide for favorable treatment of capital gains income would exclude dividends.

All but a few states tax capital gains at the same rate as ordinary income. The states that provide relief for capital gain income include:

Arkansas: excludes 30 percent of net long-term capital gains from income with the remaining 70 percent treated as regular income. [Ark. Dept. of Fin. and Admin., Subject 502, Capital Gains Tax]

Hawaii: applies an alternative tax rate of 7.25 percent on the capital gains of noncorporate taxpayers. The state’s top individual income tax rate is 11 percent. [Haw. Dept. of Revenue, 2011 Individual Income Tax Instructions]

Montana: allows a 2 percent credit for capital gains. [Montana Dept. of Rev., Individual Income Tax Rates for 2011]

New Mexico:permits deduction of the greater of $1,000 or 50 percent of net capital gains. [N.M. Stat. Ann. §7-2-34]

North Dakota: allows taxpayers to subtract from their federal taxable income 30 percent of the excess net long-term capital gain for the taxable year. [ N.D. Cent. Code § 57-38-30.3(2)(d)]

South Carolina: provides for deduction of 44 percent of net capital gains on property held for two or more years [S.C. Code Ann. § 12-6-1150]

Vermont: offers $5,000 exclusion on first $5,000 of capital gain income. [Vt. Dept. of Taxes, Technical Bulletin 60 (Jan. 6, 2011).]
                                                                                                                                                                                             By Steven Roll
Follow us on Twitter at: @SALTax
Join Bloomberg BNA's State Tax Group on  LinkedIn