June 29, 2022
While stocks may seem like an effortless path toward financial stability, they do affect your taxes. Understanding what’s expected when you file can keep you out of trouble with the IRS.
Brokerage Accounts and Taxes
When you sell the stock shares in a brokerage account, you may be responsible for capital gains taxes. Capital gains tax can affect you in two ways, depending on your circumstance:
Short-term Capital Gains Tax
This tax applies to profits from sold assets that were held for a year or less. The rates for short-term capital gains tax match your income tax bracket.
Long-term Capital Gains Tax
The long-term variant of this tax applies to sold assets held for longer than a year. The rates are 0%, 15%, or 20% depending on your filing status and taxable income. It’s important to note that long-term capital gains tax rates are usually lower, so it may work in your best interest to hold that stock for a little longer.
How Dividends Affect Taxes
There are two types of dividends and they’re usually considered taxable income, qualified and nonqualified. Qualified dividend rates range from 0%, 15%, or 20% (the same rule for long-term capital gains tax). Nonqualified dividends are ordinary dividends that have the same tax rate as your income bracket.
Taxpayers in higher brackets typically pay more taxes on dividends. Overall, dividend investments can drastically alter your tax bill.
How to Reduce Taxes on Stocks
Holding onto shares long enough for them to become qualified dividends can result in reducing taxes.
If possible, you should hold onto your assets for a little longer than a year. Long-term capital gains tax rates are often lower when you sell your stocks. Making a profit from stocks is all about strategy and figuring out what falls in line with your financial goals.
Tax Debt Assistance
If you find yourself in debt with the IRS due to stock investments, you may qualify for relief. Give us a call for a free consultation at (800) 536-0734.