Tax Implications of Investment Earnings
Besides knowing how investment earnings are paid out, it is important to know how your earnings will be taxed.
How Dividends Are Taxed
Certain qualified dividends are taxed at the lower capital gains rates: 20% for taxpayers in the 39.6% tax bracket, 15% for those in the 25%-35% brackets, and 0% for those in the 10% and 15% brackets. Ordinary dividends, however, are taxed at the taxpayer's ordinary income tax bracket. The interest from most municipal bonds is exempt from federal, and sometimes state, income taxation.
How Long-Term Capital Gains Are Treated
Capital gains on investments that are held for more than a year (called long-term capital gains) are taxed at a lower rate than other forms of income. Capital gains are taxed at 20% for taxpayers in the 39.6% tax bracket, and 15% for taxpayers in the 25%-35% brackets. For those in the 10% and 15% brackets, capital gains are currently taxed at 0%.
You Can Deduct Capital Losses
Another important tax implication is centered on capital losses—the opposite of capital gains. If you lose money on your investments, you are able to deduct up to $3,000 of your losses in excess of any gains from your taxable ordinary income. Losses over $3,000 may be carried over to future years. This explains why so many people sell their stocks in December. Investors often choose to unload securities that are losing money in December in order to take advantage of this deduction on their income tax forms.
Use the TaxFolio Checklist to Prepare and Plan for Taxes
As with any complex task, preparation and planning are solid contributors to success. Taxes are no exception. Organizing paperwork can help make the tax process run smoothly. Our TaxFolio Checklist can help. Year-round tax planning can help manage your short-term tax liability, and keep your long-term financial goals in focus.