Can I OFFSET/avoid the NC (NC DOR) tax on capital gains, if I ALSO cash out stocks with an equal (negative) amount in losses, to the state? Is there a limit on losses?

[heather64]

My question is only about NC state (NCDOR) income taxes (not federal). I am considering cashing out some stocks. I know I would have to pay a flat 5.25% on any capital gains to the state, but can I OFFSET the amount (of capital gains), if I ALSO cash out stocks with an equal (but negative) amount in capital losses? Can I do this to avoid paying capital gains tax to the state? Also, is there a limit in NC on how much I can deduct in capital losses for the state of NC?

[NCperson]

THe North Carolina state income tax is a function of the federal return.  Your NC return begins with Line 11 (AGI) of the Federal form, which already includes any capital gains.  

So you can't do something that solely affects the NC State income tax return without ALREADY impacting the Federal tax return.  

There is no such thing as 'capital gains' in NC.  NC has a flat tax.  After your standard deduction ($12,750 if filing Single and $25,500 if filing Joint), everything is taxed at 4.99% (2022) or 4.75% (2023). 

Since NC tax calculations is a function of the federal return, only $3,000 of losses can be deducted against ordinary income (but again this is already part of Line 11 of the Federal Return).  There is no additional adjustment permitted for any other losses on the NC state tax return. 

Why are you asking solely about the NC state return and not asking about the Federal return????

[Bsch4477]

While you can deduct a capital loss from a capital gain, you can’t carry over a capital loss in North Carolina as is the case with your federal return. 

[NCperson]

@Bsch4477 - maybe I don't understand what you meant, but in NC you can carry over a capital loss, but it doesn't stand on it's own. 

What I mean is if there is a capital loss that is reflected on the federal return (up to the $3,000 annual limit), NC doesn't require you to adjust that in any way.  Simply if the $3000 loss is on the federal return, then it is part of AGI (Line 11) and NC doesn't require you to add any part of the $3,000 back into NC taxable income, so in that manner NC permits the carryover of the capital loss.   

[heather64]

Thank you for your help @Bsch4477 . I'm sorry if I wasn't clear.

Maybe I'm misunderstanding the tax laws. I thought I HAD to pay capital gains to both the fed & the state of North Carolina. Is that wrong?

In our case, I believe we will fall under the "Taxable Income" threshold which will allow us 0% tax rate on federal capital gains tax. (I'm under the impression the feds use "taxable income" vs. AGI to calculate the rates. Please let me know if I'm wrong.) So, with 0% federal tax on capital gains (due to married low "taxable income").

Which leaves me with North Carolina state taxes. (I also thought North Carolina does NOT allow carry over of a loss deduction?)

I was under the impression NC taxes capital gains as income, which is a flat 5.25% flat income tax. So, I would assume any stocks I cash (all long term, for which I have gains) would be taxed at 5.25%. My question is, can I offset that same amount I would be taxed on if I also cashed out of stocks with the same amount of capital losses? (I'm wanting to avoid having to pay capital gains tax if I can.)

Example hoping to illustrate what I'm asking: 

If I cash out 100 shares of company A, for $1,000 (cost basis $500), my gain is $500.

AND

If I cash out 50 shares of company B, for $5,000 (cost basis $5,500), my gain is -$500 (a loss).

SO... *(Edited to correct my math to show a $500 loss)*

I cash out $6,000 with $0 in capital gains overall. 

These are made up numbers... but since in my scenario I would owe 0% to the fed in capital gains tax, I would be subject to NC income tax. My question is, for NC income tax, would I have 0% income tax on these stocks being sold and cashed out? Would the $500 gain and the $500 loss cancel each other out? 

Thank you. I hope my question makes sense and I apologize if I'm asking it the wrong way. 

[VolvoGirl]

You must have mixed  up the amounts on 50 shares of company B.  Sold 5,000 - 4,500 cost is a 500 GAIN.  

[NCperson]

@heather64  I think you are confusing 'income tax' with 'income'.

you have to determine "income" before you can determine "income tax". 

let's look at the federal return and use your example.  There would be no impact to Line 11, Adjusted Gross Income, on the federal return since the transactions in your example net to zero.  

NC begins the tax return with that same Line 11.  So since there is no impact to Line 11, there is no impact on the State return either.  So no impact on TAX.  Given your example, it would not impact your STATE income tax.

But let's use another example.  Let's say your Federal Income is $30,000.  And then you sell stocks for a gain of $10,000.  That would increase Line 11 of the Federal return by the same $10,000.  The FEDERAL INCOME TAX would not change since the capital gains tax at that income level is 0%.   

HOWEVER, NC uses that same Line 11 to begin its calculation, and there is a flat tax in NC with nothhing called ' capital gains tax'.  So NC would tax that $10,000 of additional income at 4.75% in 2023 which means while there would be no federal tax due to this transaction, NC tax would increase by $475. 

does that make sense?  

(and again, 5.25% was the 2021 tax rate.  the state is reducing tax rates so it is 4.99% in 2022 and 4.75% in 2023).

[VolvoGirl]

 My question is, can I offset that same amount I would be taxed on if I also cashed out of stocks with the same amount of capital losses? (I'm wanting to avoid having to pay capital gains tax if I can.)

Yes that's how it works.   You first net the gains and losses.  Then you are only taxed (if any) on a Net Gain. 

[heather64]

Thank you, so much @NCperson . It does. I also appreciate you updating me on the tax rate.

Forgive me, but to clarify... for your example, you didn't factor in the loss on the second stocks sold. If I sell two different stocks, one with a loss and one with a gain, do I understand correctly that the "income" would only be the total amount of the gain?

Example: $30K taxable federal income. Pretend I sell stock A for $20,000 (with a $10,000 GAIN), AND, I also sell stock B for $20,000 (but, with a $10,000 LOSS).

While I sold and cashed out $40,000 total, my total gain in this example is $0, so wouldn't my NC tax be $0? (For NC taxable income, wouldn't the loss be deducted from the gain, leaving me with $0 in income to be taxed?)

Thank you so much 

[heather64]

Good catch, thanks. I edited my question.  I meant to show was me me walking away having sold and cashed out stocks, but with a net gain of $0 (with gains offsetting the loss). 

[heather64]

@VolvoGirl Thank you!!!

[heather64]

Sorry, I forgot to follow up and ask if anyone knows if NC has a limit on the loss you can deduct (or if that matters in my scenario)?

https://www.irs.gov/taxtopics/tc409

I know this is federal, and federal taxes capital gains separately but I'm assuming there's no "limit" on losses for the state because the income would simply be whatever the gains are minus the losses = income to be taxed?

[NCperson · Accepted solution]

@heather64 yes, you ALWAYS net the gains and the losses..... if that net is positive, any tax is only on the NET of the gains and losses.  

<<Example: $30K taxable federal income. Pretend I sell stock A for $20,000 (with a $10,000 GAIN), AND, I also sell stock B for $20,000 (but, with a $10,000 LOSS).

While I sold and cashed out $40,000 total, my total gain in this example is $0, so wouldn't my NC tax be $0? (For NC taxable income, wouldn't the loss be deducted from the gain, leaving me with $0 in income to be taxed?)>>

Correct, both the Federal Capital gains TAX and the NC TAX would be zero! 

Just to be technical, for NC taxable income, the loss would have already been deducted from the gain as part of the calculation of the federal income (line 11); there would be nothing to do on the NC tax return.  

[NCperson]

@heather64 - to the follow up question...the loss limit is the same as the federal limit..... assuming the results is zero or positive (let's not confuse things if the result was negative), but the losses can always be netting aginst the gains. 

let's say you sold a stock for a $1 million gain and sold another stock for a $1 million loss, it's only the net of $-0- that matters. 

[heather64]

Thank you so very much @NCperson. I definitely have a lot to learn and wasn't processing how line 11 would change the income. Thank you!