Capital Gains Tax in Wisconsin: Everything You Need to Know

Grasping the concept of capital gains tax is important for residents of Wisconsin, especially those who invest or run businesses. Knowing how these taxes work can significantly affect your financial outlook, helping you take measures to manage and possibly reduce your tax dues.

In this comprehensive guide, we’ll simplify the topic of capital gains tax in Wisconsin. You’ll learn about capital gains, the taxation process at both federal and state levels, and strategies to minimize your tax load. Whether you are an investor, a business owner, or someone planning your financial future, this article will provide insights and actionable advice.

Understanding Capital Gains

Capital gains represent the profit made from selling an asset for more than its purchase price. These assets can range from stocks and bonds to real estate and other valuable items. Recognizing the different types of capital gains is essential for understanding how they are taxed.

Short-term vs. Long-term Capital Gains

Short-term capital gains are generated when you sell an asset you’ve held for a year or less, and these gains are taxed at your ordinary income rate. On the other hand, long-term capital gains occur when you sell an asset after holding it for more than a year, which will typically be taxed at a lower rate.

How Capital Gains Are Realized

Capital gains become “realized” when an asset is sold. Additionally, capital gains can be realized through inheritance and gifts. When you inherit an asset, its value at the time of inheritance becomes the new cost basis for future gains calculations. Whether selling assets, receiving them as gifts, or through inheritance, realizing capital gains means the asset has been sold or transferred, making the gain taxable.

Federal vs. State Capital Gains Tax

Grasping how capital gains are taxed at both federal and state levels is important for your financial planning. Each level has distinct rules that can significantly impact what you end up paying Uncle Sam over the course of your lifetime. 

Federal Capital Gains Tax

The federal government taxes capital gains differently based on whether they are short-term or long-term. Short term capital gains are taxed at the same rate as ordinary income. This often means a higher tax rate for these gains, dependent on your total income (usually between 10% and 37%).¹ In contrast, long term capital gain rates apply to assets held for over a year and are usually lower. For 2024, federal long-term capital gains rates are:²

• 0% for single filers whose taxable income goes up to $47,025 and married couples filing jointly up to $94,050.
• 15% for income between $47,025 and $518,900 for single filers, and $94,050 to $583,750 for married couples filing jointly.
• 20% for incomes above these thresholds.

Wisconsin Capital Gains Tax

Capital gains in Wisconsin are taxed as part of your state income, with rates varying based on your overall income and filing status. The tax rates for 2024 are:³

• 3.54% for incomes up to $13,810 for single filers and up to $18,410 for married couples filing jointly.
• 4.65% for incomes between $13,810 and $27,630 for single filers, and between $18,410 and $36,840 for married couples filing jointly.
• 5.30% for incomes ranging from $27,630 to $304,170 for single filers, and from $36,840 to $405,550 for married couples filing jointly.
• 7.65% for incomes above $304,170 for single filers, and above $405,550 for married couples filing jointly.

Please Note: Wisconsin allows a 30% exclusion on long term capital gain for assets held over a year and a 60% exclusion for gains from selling farm assets. These exclusions can significantly reduce the amount of taxable income from capital gains.⁴

Other Provisions and Exemptions

Several other provisions and exemptions to help you reduce your capital gains tax liability. These include:

1. Primary Residence Exclusion: If the property has been your primary home, you can potentially exclude up to $250,000 of the profit from taxation (or $500,000 for married couples) provided you’ve resided in it for at least two of the previous five years.⁵

2. Small business stock exemptions: Investments in certain small businesses may qualify for exclusions, potentially allowing up to 100% of the capital gains to be excluded if specific requirements are satisfied.⁶

3. Retirement accounts and tax-advantaged investments: Contributions to retirement accounts such as IRAs or 401(k)s can offer tax benefits that lower your overall tax liability, including on capital gains.

Calculating Wisconsin Capital Gains

Determining your capital gains accurately is necessary for correct tax reporting, and the process kicks off by determining the cost basis. The cost basis is the original purchase price of an asset plus any additional costs like brokerage fees or improvements. For example, if you purchased a capital asset for $300,000 and spent $40,000 on upgrades, your cost basis would be $340,000. This is used to calculate your gain when the asset is sold.

Accounting for Improvements and Depreciation

Improvements made to an asset increase your cost basis, thus reducing your capital gains. Conversely, depreciation reduces your cost basis, potentially increasing your taxable gain. For example, if you claimed $40,000 in depreciation on an investment property, this amount is deducted from your cost basis.

Adjusting for Splits, Dividends, and Other Factors

Events such as dividends, the splitting of stocks, and other adjustments can change your cost basis. The number of shares you own increases after a stock split, and the cost basis per share adjusts accordingly. For instance, if you own 100 shares bought at $50 each and a 2-for-1 stock split occurs, you will now have 200 shares with a cost basis of $25 each.

Reporting and Paying Capital Gains Tax

Ensuring accurate reporting and payment of your Wisconsin capital gains tax will help you to avoid penalties and stay compliant with tax laws. Here’s how to manage this process effectively:

Filing Requirements in Wisconsin

When you have capital gains to report, you must include them in your state tax return. Here’s what you need to do:

Necessary Forms and Schedules: Use Wisconsin Schedule WD to report your capital gains and losses. This form helps calculate your net gain or loss, which you then include in your income.

Deadlines and Filing Processes: Your Wisconsin state tax return is typically due on April 15th, the same as your federal tax return. Make sure all required forms and schedules are filled out correctly and submitted on time to avoid late filing penalties.

Paying the Tax

Paying your taxes promptly helps avoid interest charges and potential penalties. Wisconsin offers multiple payment methods to accommodate different preferences and needs. Consider which option works best for you and your financial situation.

Ways to Make Your Payments:

• Online through the Wisconsin Department of Revenue website
• By mail, using a check or money order
• Electronic funds transfer (EFT) directly from your bank account

Please Note: If you expect to owe a substantial amount in capital gains tax, consider making estimated tax payments throughout the year. This helps you avoid underpayment penalties and manage your tax liabilities more effectively. These payments are usually made quarterly.

Strategies to Minimize Capital Gains Tax

Reducing the amount you owe on capital gains tax can have a significant impact on your overall financial health. Here are some strategies to help minimize your Wisconsin capital gains tax:

• Tax-Loss Harvesting: This technique allows you to counterbalance your gains by utilizing losses from assets that have dropped in value, thus lowering your taxable income. This approach is particularly beneficial if you’ve experienced significant gains during the year. As the tax year draws to a close, review your portfolio for assets that have depreciated. Sell these assets to recognize the loss, but keep an eye out for the “wash sale” rule. This rule prevents you from buying back the same or a substantially identical asset within 30 days.
• Leverage Tax-Advantaged Accounts: To effectively manage capital gains taxes, leverage IRAs and 401(k)s. Contributions to these accounts can be deducted from your taxes, and the investments grow tax-deferred. This means you won’t pay taxes on gains until you withdraw the funds during retirement.
• Health Savings Accounts (HSAs): HSAs provide substantial tax advantages. You can deduct contributions, the account grows without incurring taxes, and you can take out money tax-free for qualified medical expenses. This approach offers considerable tax savings both immediately and long-term.
• Holding Periods and Asset Allocation: Planning to hold investments for at least one year can allow you to benefit from lower tax rates. 
• Diversification: Allocating your investments across a variety of asset classes and sectors can create a more balanced portfolio. This approach can also minimize the effect of any single investment’s gains on your overall tax obligations.

Impact of Capital Gains Tax on Financial Planning

Aligning your investments with tax strategies can significantly enhance your overall financial plan. When selecting investments, consider their tax implications. Holding assets for more than a year can qualify for lower long term capital gain tax rates. 

Planning your investment purchases and sales thoughtfully can also make more of your tax outcomes. Strive to balance your investments’ growth potential with their tax efficiency. Diversifying your portfolio can help manage risks and reduce the tax impact on your returns.

Estate Planning and Capital Gains

Capital gains tax is a critical factor in estate planning. This tax significantly influences asset transfer to your beneficiaries. When you die, the cost basis of inherited assets is adjusted to their market value at the date of death. This step-up in basis can reduce the potential capital gains tax your heirs might face if they sell these assets.

Moreover, gifting assets during your lifetime means the recipient inherits your original purchase price as their cost basis. This could lead to higher taxes if they sell the asset. Understanding these implications is crucial for effective estate planning.

Capital Gains Tax In Wisconsin FAQs

1. What do I need to know about capital gains tax?

Capital gains tax is the tax on the profit from selling an asset at a higher price than its purchase cost. The applicable tax rate is determined by the duration for which the asset was held. Profits from assets held for one year or less are taxed at the standard income tax rate, while those from assets held for more than a year benefit from reduced tax rates.

Please refer to the ‘Federal Capital Gains Tax’ and ‘Wisconsin Capital Gains Tax’ sections above for a deeper understanding of the rates and exemptions applicable to your situation.

2. How does the IRS know if you have capital gains?

The IRS is informed about your capital gains because financial institutions report transactions to them. Additionally, you are required to report any gains on your tax return using the appropriate forms and schedules.

3. How do I calculate capital gains on sale of property?

To calculate capital gains from a property sale:

Step 1) Determine the Basis: This starts with the property’s purchase price, adding any improvements made, and subtracting depreciation if the property was used for business or rental purposes.

Step 2) Calculate the Sale Price: This is the selling price minus any costs incurred during the sale, such as commissions and fees.

Step 3) Subtract the Basis from the Sale Price: The difference is your capital gain or loss.

Capital Gain = Sale Price − Adjusted Basis

Step 4) Apply the Correct Tax Rate: Determine if the gain is short-term or long-term and apply the relevant tax rate, including both federal and Wisconsin state rates.

4. Do I have to buy another house to avoid capital gains tax?

There are a variety of ways to reduce your capital gains tax liability when you’re looking to buy or sell a home. These include:

Primary Residence Exclusion: If your property was your main home, you might qualify to exclude up to $250,000 of the profit from taxation ($500,000 for married couples) as long as you lived in it for at least two of the previous five years.

1031 Exchange: For those with investment or business properties, you can defer capital gains taxes by reinvesting the proceeds from your sale into a similar property. This process, known as a 1031 exchange, requires compliance with specific IRS rules and timelines. By doing so, you can potentially grow your investments without incurring immediate tax liabilities.

Offsetting with Capital Losses: To lower your taxable income, you can offset your gains by using losses from other investments. This approach, referred to as tax-loss harvesting, helps in reducing your overall tax burden and can lead to a more advantageous financial situation.

Let Us Help You

Mastering the details of capital gains tax in Wisconsin is one of the keys to effective financial management. This guide has detailed the differences between short-term and long-term capital gains, as well as Wisconsin’s unique regulations, empowering you to make more informed financial decisions.

For personalized strategies tailored to your needs, professional guidance can be invaluable in navigating the complexities of capital gains tax. Staying informed about tax laws and regulations is crucial. Our financial advisory team is here to help. Schedule an introductory call today!

Citations:

1. https://www.investopedia.com/terms/s/short-term-gain.asp#:~:text=Short%2Dterm%20capital%20gains%20are,between%2010%25%20and%2037%25
2. https://www.bankrate.com/investing/long-term-capital-gains-tax/#what-is-the-long-term-capital-gains-tax-rate
3. https://states.aarp.org/wisconsin/state-taxes-guide
4. https://www.revenue.wi.gov/DORReports/17sumrpt.pdf
5. https://www.revenue.wi.gov/Pages/FAQS/pcs-salhom.aspx#:~:text=If%20you%20meet%20the%20ownership,married%20filing%20a%20joint%20return
6. https://docs.legis.wisconsin.gov/misc/lfb/budget/2009_11_biennial_budget/103_budget_papers/356_general_fund_taxes_decrease_capital_gains_exclusion.pdf