[ad_1]
Important points
- To determine if there is a capital gain, subtract the original purchase price from the sales price. The profits earned are counted as income for tax purposes. If the asset he holds for more than one year, he pays a preferential long-term capital gains tax rate of 0% to 20%, as opposed to a short-term capital gains tax rate of 0% to 37%.
- Investors can download investment income forms from their brokerage firm. His IRS Form 1099-B for capital gains, 1099-DIV for dividend income, and 1099-INT for interest income.
- Investors who need time to pay their full tax bill can apply for a monthly installment plan using IRS Form 9465.
If you sell an investment at a gain in 2023, you could face a tax bill unless you sell other investments at a loss to offset that gain. In either case, it can be difficult to know how much of your investment income is taxable and how it will be taxed.
Here’s how to pay taxes on investment income:
To determine if there is a capital gain, subtract the original purchase price from the sales price. The resulting profits count as income for tax purposes, said David Blaine, CEO of New Bern, North Carolina-based Blue Sky Wealth Advisors.
Capital gains are classified as long-term or short-term. Short-term capital gains are taxed at ordinary income tax rates. Long-term capital gains occur when you sell an investment you’ve owned for more than a year for a profit. This is an advantage because long-term capital gains are taxed at a more favorable rate than short-term capital gains.
In 2023, long-term capital gains rates will range from 0% to 20% based on taxable income. Most people can expect him to pay 15%. However, these tax rates may change if certain provisions of the Tax Cuts and Jobs Act are repealed on December 31, 2025.
You can offset long-term capital gains by selling other investments at a loss through loss recovery. Individual taxpayers can deduct up to $3,000 of capital losses in excess of capital gains from their ordinary income each year. The remainder is carried forward to offset next year’s profits.
Interest earned on certificates of deposit, money market funds, and bonds is also taxed as ordinary income. Typical marginal income tax rates can be as high as 37%.
“Don’t forget about state taxes, as each state has its own tax laws,” Blaine says. “Some places impose a capital gains tax, while others tax it as ordinary income.”
Some stocks distribute through dividends, and investors who sell those stocks will pay taxes on the dividend income they received while they owned them. “Interest income is taxed in ordinary income tax brackets ranging from 12% federal tax up to 37%,” Blaine says.
And again, don’t forget state taxes, “some states tax interest income up to 13.3%,” he added.
Investors can download investment return forms from their brokerage firm. IRS Form 1099-B is used by businesses to report capital gains or losses. IRS Form 1099-DIV is used to report distributions of dividend income and capital gains. IRS Form 1099-INT is for reporting interest income. Some brokers will issue a Composite 1099 form that includes all three.
Brokers are required to provide these forms to investors so they can report various types of investment income, but investors report this income using Schedule D, also known as Form 1040.
Tax-deferred accounts such as 401(k)s. An individual retirement account known as an IRA. Health Savings Accounts (HSAs) are known to be tax-advantaged because their annual earnings are not taxed, but these accounts are not permanently tax-free.
“When you withdraw money, you pay regular income tax on the amount you withdraw from your account,” Blaine says. You do not need to withdraw money from your retirement account until you are 72 years old (if he becomes 72 years old after December 31, 2022, he is 73 years old). And thanks to Secure Act 2.0, his required minimum distribution age (RMD) will increase to 75 in 2033.
The exception to these RMDs is Roth IRAs. “Roth IRA distributions are tax-free and there is no date required to take the money out,” he says. This is because Roth IRAs are funded with after-tax dollars.
In other words, the IRS already gets its share, so if you follow its rules, you can keep everything else in your pocket. These rules are:
- Roth IRA contributions can be withdrawn tax-free and penalty-free at any age.
- Roth IRA earnings can be withdrawn tax-free and penalty-free after age 59 1/2, as long as the account is at least 5 years old.
Roth IRAs aren’t the only way to generate tax-free income. Other examples of tax-exempt income include interest on municipal bonds. This is typically exempt from federal taxes, but may also be exempt from state and local taxes if you live in the state where the bond is issued. The opposite is true for interest earned on U.S. Treasury securities, which is generally exempt from state but not federal taxes.
Capital gains taxes can be especially tricky when dealing with mutual funds. When a mutual fund manager sells assets within a fund at a profit, that profit is passed on to the fund’s investors and considered income by the IRS. These distributions are reported on Form 1099-DIV at the end of each calendar year.
“Mutual fund managers have discretion over when to buy and sell securities within the fund,” says Michael Barkhahn, a certified financial planner and vice president at Graham Capital Wealth Management. As an investor, you are responsible for any capital gains that come with it.” This lack of control on the part of the investor, and the fact that these distributions may not be made until his December, makes mutual fund tax planning difficult.
“Capital gains fluctuate from year to year, adding an element of unpredictability to investors’ annual tax planning, which can be particularly frustrating,” says Barkhahn. “This makes it imperative for high-income earners that investors carefully consider these tax implications before deciding whether mutual funds should be part of their investment strategy.”
If you buy and sell stocks frequently, it’s a good idea to set aside some money each month to avoid big federal tax shocks.
“Most people aren’t very good at saving money,” says Steve Wittenberg, director of legacy planning at SEI. “It takes discipline to consistently set aside money for any purpose, especially for taxes. Tax claims can be difficult if you invest and try to earn a large amount of non-wage income. .”
He said many wealth advisors will work with clients to allocate assets to low-risk or liquid accounts in anticipation of large tax bills. “That way, you’ll have cash on hand when the IRS comes knocking,” he says.
“If your tax situation is more complex and especially inconsistent, we highly recommend providing your tax professional with one or more tax projections to calculate the amount of tax you owe,” Wittenberg said. say.
He said many investors are required to make quarterly payments to pay their taxes on time and avoid underpayment penalties.
Experts say if the amount owed is less than $50,000, taxpayers should file IRS Form 9465 or apply for an installment agreement online.
At the end of the day, Blaine says, stocks should be the driving force behind investment decisions, not taxes. “I’ve seen people refuse to sell things because they don’t want to pay taxes, or trade too often and lose a significant percentage of their profits to taxes.”
[ad_2]
Source link
