Stocks are a great way to build an investment and to gain more financial security about your future. It is important to note, however, that there are still taxes that apply to your stocks — so hopefully, you’re not surprised during tax season. The profit that you make on your stocks is taxable up to 20%; that amount will need to be paid back. It is important to understand how taxes on stocks work though as seen below.
Taxes on Capital
If you sell shares of stocks to earn money in a brokerage account, you have to pay taxes on these capital gains. The short-term tax is for any capital that you had for less than a year and are based on your tax bracket. Long-term taxes are for capital that you have had over a year that either has a 0% tax or up to a 20% tax. The longer you hold your capital, the less taxes that you will have to pay on these gains come the time for tax season.
In almost every circumstance, dividends will always have taxes that have to be paid on them. Ordinary, or nonqualified, dividends will have taxes that are based on your bracket. Qualified dividends, however, will have less taxes, and you could pay nothing on taxes or up to 20% on them. When you came into ownership of the investment that pays dividends will have a significant effect on how much you have to pay on your taxes though. Every dividend will have its own unique set of rules according to the IRS to help you determine how much your tax payments are.
Plan for the Future
It is always important to plan for the future with the taxes that you will have to pay on your stocks. Think of the long-term and try to hold on to any capital gains for as long as possible in order to lower the amount of taxes that you owe. You should also hold any shares as long as possible so that the dividends become qualified in order to pay less. Make sure that this always meets your financial goals though in order to make the most money and reduce tax spending as much as possible.
You should always consider your net capital gain, which is the gains minus the losses. If you have more loss than gain, consider that a deduction when it comes time to paying your taxes. If your dividends and capital are held in a traditional IRA account, they are also tax free so be sure to take this into consideration as well. If you keep your money inside of your 401k account, you will not have to pay taxes either. This is the best solution to help you save.
Stocks are a great way to prepare for your financial future, but often, they have expensive tax costs involved with them. Make smart decisions in where to place your investments and on how long to hold on to your stock investments in order to save as much on your taxes as possible. This will ensure that you are getting the most money possible out of investing in stocks for your future.