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I want to know how capital gains taxation works to understand better about taxes. To make it very simple lets say that Federal capital gains tax rate is 20% and state capital gains tax rate is 10%. And all capital gains tax rates and income is for long term only. And if the income is 100K, then all I have to pay is:

A) 20% of 100K

OR

B) 20% of 100K to Federal + 10% of 100K to State?

All I am trying to understand is, whether if we have to pay for both separately. Because if you consider short term capital gains, then you have to pay 50% (approximately) of your income to taxes if you make more than 530K assuming you live in a state that has capital gains or state tax of 8 to 12 percent.

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    Of course you have to pay each separately, they are two separate taxing agencies...
    – quid
    Mar 17, 2021 at 1:53

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State capital gains tax is an income tax, and thus deductible from your Federal AGI (subject to the $10K limitation) if you itemize deductions on your Federal return. Be aware that many states simply impose the general income tax rate on the Federal AGI less the State deductions (e.g. interest from Treasury bonds is not taxable by a State, some States don't tax retirement income such as IRA withdrawals, pensions, or Social Security benefits) and state additions (e.g. municipal bond interest is not Federally taxed income but is taxed by States for municipal bonds issued by out-of-state entities. But Yes, if the state does tax capital gains at 10%, then you pay the Federal income tax and the State income tax separately.

Do you have a particular State in mind that imposes State income tax on ordinary income at less than 10% but taxes capital gains at 10%?

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