If you have cashed out capital gains in New Jersey, you know you’ll lose something to taxes. But how much? It’s important to understand your capital taxes and how they will impact your financial future, not least because that knowledge will empower you to take action to reduce your tax bill today.

In this article, we’ll explain what capital gains are, how they are taxed in New Jersey.

We’ll also show you different tax planning strategies that can significantly reduce your state capital gains tax:

• Sell appreciated assets in a tax-exempt trust through Charitable Remainder Trusts
• Buy renewable energy projects that make you eligible for significant government tax incentives that lower your capital gains tax bill.
• Reduce your taxable income with charitable deduction tax strategies such as Charitable Lead Annuity Trusts and Conservation Easements.

What Are Capital Gains?

Capital gains are a capital asset’s increase in value from the value at which it was purchased. Capital assets can include stocks, real estate, or even an item purchased for personal use like a car or a boat – in short, any significant property that could gain or lose value over time.

Capital gains can be realized or unrealized. “Realized” in this context means “acquired” or “received,” so realized capital gains are gains that you have captured by selling the asset. Unrealized gains, by contrast, represent a change in the value of an investment that you have not yet sold. For instance, if you hold stock that increases in value, but you haven’t sold it yet, that is considered an unrealized capital gain. Critically for our purposes, in most cases you will not pay taxes until you cash out or “realize” the gains.

What Are The Types Of Capital Gains?

There are two types of realized capital gains for taxation purposes:

• Short-term capital gains: These are gains from selling assets that you’ve held for one year or less. At the federal level, short-term capital gains are typically taxed at the same (high) rate as ordinary income.
• Long-term capital gains: These are gains from selling assets that you’ve held for more than one year. Generally, at the federal level, long-term capital gains receive more favorable tax treatment than short-term gains.

How Are Capital Gains Taxed?

Capital gains are not taxed until they are realized, meaning that even if your Apple stock has increased 50x from the day you invested, you won’t owe any capital gains taxes until you sell the stock. Of course, once you do sell the stock, you will face federal and state capital gains taxes.

Realized capital gains are typically subject to both federal and state taxes. The tax rate you will pay on capital gains will vary depending on where you live, your income, and the type of asset you sold but the federal and state tax systems are generally progressive, so individuals with higher incomes face a higher capital gains tax rate. Let’s look at how federal and state governments tax capital gains.

What Is The Federal Capital Gains Tax (2023)?

Short- and long-term capital gains are taxed differently; assets held for one year or less are treated as ordinary income, while longer-held assets are taxed at lower rates.

The short-term capital gains schedule matches the schedule for ordinary income, and your marginal and effective rates depend on your income and marital status, as shown below: