What new investors need to know about taxes on investments

A recent online survey by Deutsche Bank found that half of the participants aged between 25 and 34 years plan on spending 50% of their stimulus checks on stocks. This in addition to the GameStop short squeeze means a lot of new investors are getting involved in the market. Ultimately, this is great for the market and can be great for the new investors who make smart decisions, but this also means there is a lot these new investors need to learn.

For example, did you know you may owe taxes on the gains from your investments? It is important to factor these taxes into your financial plan to make sure you can pay for them when tax season rolls around.

Some examples of taxes on investments you may be liable for include:

Capital gains taxes

When you make a sale of an asset, such as a share of stocks, you may owe capital gains taxes. 

Capital gains taxes are divided into two categories:

• Short-term capital gains — Short-term capital gains taxes are levied on profitable sales of assets that you have held for less than one year. These are taxed at the income rate of whatever tax bracket you fall under. The value of the sale is included as taxable income, so if you sell assets for large short-term gains, you may be in a higher tax bracket.
  
• Long-term capital gains — A long-term capital gain tax is levied on an asset that can be levied on profitable sales of assets held for longer than one year. These are taxed at a rate of 0%, 15% or 20% depending on your filing status and income level.

We recommend using a capital gains tax calculator to get an idea of what you will owe in capital gains taxes, so you can plan accordingly.

Dividend taxes

If you receive dividends from an investment, you may owe taxes on them for the year you received them, even if they are automatically reinvested. 

Dividend taxes are divided into two categories:

• Nonqualified — A nonqualified dividend is taxed under your normal federal income tax rate.
  
• Qualified — A qualified dividend can be taxed at 0%, 15% or 20% depending on your tax bracket and whether it meets the qualifications outlined by the IRS.

Qualified dividends are described by the IRS as:

• Paid by a U.S. company or qualifying foreign company.
• Held for the required holding period.
• Not listed as nonqualifiable by the IRS.

Withdrawal taxes

Have you been saving for retirement with a 401(k), traditional IRA or another account in which your funds have been growing tax-free? Once you are retired and start making withdrawals, they are subject to income tax. Use an income tax calculator to help estimate what your taxes will be, so you can plan accordingly.

Tax loss harvesting

If one or more of your assets are dropping below your cost basis, you can sell at a loss and reduce your taxable income. This is known as tax loss harvesting.

An individual investor may deduct up to $3,000 of net capital losses per year. An excess of this allowance can be used to offset future gains.

When tax season is rolling around, make sure to check all your investments and see if there are any that are underperforming that you can sell at a loss to reduce your tax liability. If you are having a hard time figuring out what to do in these circumstances, you can always talk to a financial professional for assistance.

Talk to a ProVise CFP® professional about taxes on investments

Everyone loves to see their portfolio grow, but it is not as fun to give up a portion of that to taxes. Still, you need to factor taxes on investments into your financial plan to make sure you can pay for your taxes and avoid penalties, as well as to potentially lower your tax liability with a tax strategy.

At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.

Are you ready to talk to a professional about taxes on investments? Contact ProVise today to schedule a complimentary consultation.