What Income Is Taxed at 12% in MA?
Massachusetts paycheck tax is straightforward with a flat tax rate of 5% on most earned income. However, a 12% tax rate is applied in MA to specific types of earnings.
What Income Is Subject to the 12% Tax Rate in MA?
The 12% tax rate in Massachusetts applies to:
Short-Term Capital Gains: This includes profits from selling stocks, real estate or other capital assets held for one year or less.
Collectibles Gains: If rare coins, art or other collectibles are sold within a year, the state treats these gains as short-term and taxes them at 12%.
Why Does Massachusetts Tax Short-Term Gains at a Higher Rate?
Since short-term capital gains are considered speculative income rather than long-term investments, they are subject to taxation at a higher rate than long-term gains. MA imposes such rate to encourage long-term investment options over fast trades.
Examples of Short-Term Capital Gains Taxation
The following scenarios can be considered to have a better comprehension of how the 12% tax rate works:
Example 1: You buy stock in a company for $5,000 and sell it six months later for $6,000. The $1,000 gain is taxed at 12% which results in a $120 state tax.
Example 2: You purchase a painting for $2,000 and sell it eight months later for $3,500. The $1,500 gain is taxed at 12%, leading to an amount of $180 tax liability.
How Does the 12% Tax Rate Compare to Federal Taxes?
The IRS taxes short-term capital gains as ordinary income. It means that the federal tax rate depends on the federal tax bracket. This rate could be considerably higher than the Massachusetts 12% rate for high-income earners.
Key Takeaways
MA income tax rate is a flat 5%. But short-term capital gains and certain collectibles are taxed at 12%.
Income from assets held for one year or less is subject to this higher tax rate.
Federal tax rates on short-term gains vary based on income level. It is vital to consider the combined tax impact.
If you're unsure about how the 12% tax applies to your investments, consider reaching out to Dimov Associates for expert tax guidance.
