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I reported capital gains (reported to me on a 1099-DIV) on my 2015 Form 1040A "U.S. Individual Income Tax Return" (line 10.) Using the "Qualified Dividends and Capital Gain Tax Worksheet" on p. 38 of the 2015 1040A instructions, these capital gains were taxed federally at a 15% rate, which is lower than my income tax rate for wages. The outcome of this calculation was that my federal tax liability was decreased compared to if the capital gains had been taxed at my rate for wages. I entered a number on line 28 of the 2015 1040A that was smaller than if these capital gains had been taxed at my federal rate of income tax for wages.

Now, on my Virginia 2015 Form 760 "Individual Income Tax Return" I am instructed to enter my "Adjusted Gross Income from federal return" on line 1 (this amount comes from line 28 of my Form 1040A.) This amount on the federal return includes the capital gains. Line 17 of the Form 760 instructs me to calculate my tax liability using the Tax Table from the Form 760 instructions. The tax liability I look up in that table is applying the income tax rate applicable to my wages to the capital gains. But I think that the tax rate applicable to capital gains in Virginia is only 5.75%. ("In Virginia, that’s an additional 5.75%").

I can't find anywhere in the Form 760 that explain how to handle the tax on capital gains separately from income tax on wages. The closest thing I can find is that on the Form 760, line 7 instructs me to include "Subtractions from enclosed Schedule ADJ". The Form 760 instructions regarding subtractions from income (p. 21) include "52 Certain Long-Term Capital Gains - Provided the long-term capital gain or investment services partnership income is attributable to an investment in a “qualified business” as defined in Va. Code § 58.1-339.4". But when I look at that law, it seems that it only applies to investments in small Virginia businesses. (These capital gains come from distributions from an investment in a non-Virginia mutual fund.) So I can't figure out any way to decrease my tax liability to the state of Virginia on these capital gains. I don't understand why the Form 760 would require me to pay tax on these capital gains at my full income tax rate when 1) my federal return includes specific instructions for decreasing my tax liability on these capital gains, and 2) it appears that the applicable tax rate on capital gains in Virginia is 5.75%. I would greatly appreciate any insight into this. Thanks in advance.

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    You keep mentioning 5.75%. I believe that is the maximum tax rate on income in Virginia. What is rate you are are paining on income to Virginia? – mhoran_psprep Apr 10 '16 at 10:59
  • Oh. Well that's the answer. I forgot to check what the maximum income tax rate in Virginia was. I incorrectly assumed it was higher than 5.75%. Thank you for pointing that out! If you want to add that as an answer, I will accept it. – Carl G Apr 11 '16 at 15:57
  • I sold an investment property in VA but I don’t belive that I owe Capital gains tax, because otherwise my income is low. In Virginia do I get a break, or will I have to pay 5.75% no matter what? – carol Apr 14 at 11:13
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In Virginia the maximum tax rate on income is 5.75% which is the same as the capital gains rate.

http://www.tax.virginia.gov/income-tax-calculator

 Va Taxable Income  Tax Calculation
      0 - $3,000            2%
 $3,001 - $5,000      $60 + 3% of excess over $3,000
 $5,001 - $17,000    $120 + 5% of excess over $5,000
$17,001 -            $720 + 5.75% of excess over $17,000

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