What You Need to Know About How Your Stocks Affect Your Taxes

What You Need to Know About How Your Stocks Affect Your Taxes

December 31, 2020

Tax season will be here before you know it—do you know how your stocks are taxed, and how to maximize your credits and deductions to offset them? Profits and dividends are both taxable, so it’s important that you know what to expect from the IRS when you buy and sell shares. Here’s what you need to know about investment taxes in Union City, NJ.

Taxes on dividends

Dividends are usually taxable, and they are categorized as either qualified or non-qualified. If you have non-qualified dividends, they’ll be taxed at the same rate as your ordinary tax bracket, while qualified ones are taxed at either zero percent, 15 percent or 20 percent, depending on your filing status and income bracket. This is usually lower than non-qualified dividends, but not always.

If you have dividends, make sure that you work with a qualified tax professional. The higher your tax bracket, the more money you’ll pay on dividends. The way you own a stock—and when—also makes a big difference. As always, there are many special rules about dividends, so working with a tax professional can help you make the best decisions for your finances and tax liability.

Capital gains taxes

If you have shares of stock in a brokerage account, you’ll be liable for capital gains taxes whenever you sell them—assuming you make a profit. If you’ve held that asset for less than a year, you’ll pay short-term capital gains, while assets over a year old are taxed as long-term capital gains. The latter is taxed at zero, 15 or 20 percent—again, depending on your income bracket and tax filing status. However, long-term capital gains are often taxed at lower rates than short-term capital gains.

How to pay lower taxes

Naturally, clients want to pay as little in taxes as possible. There are three ways to do so.

First, you should hold on to your assets as long as possible—as long as this works with the rest of your investment goals, waiting until an asset is qualified or becomes a long-term capital gain will often lower your tax rate significantly.

You can also use your investment losses to offset capital gains, which allows you to deduct up to $3,000 of losses per year, or $1,500 if you’re married, filing separately.

Finally, you might choose to put your stocks in an IRA or 401(k) account. Dividends and capital gains are tax-deferred or tax-free, depending on the type of IRA account you have, while 401(k) accounts shield you from taxes on investment growth, dividends, gains or interest.

However you choose to handle your taxes, make sure you work with an experienced tax professional. Tax laws are notoriously complex and labyrinthine. Protect your investments and your hard-earned income by consulting a professional—they will evaluate not only your assets, but your financial goals, in order to set you up for success. For help with understanding taxes on stocks in Union City, NJ, call Kedean’s Generation today to arrange a consultation.

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