The article below is up to date based on the latest tax laws. It is accurate for your 2019 taxes (filed in 2020) and 2018 taxes, which should be filed by the April 15th, 2019 (or October 2019 with filed extension) deadline
Investing for your future and for your retirement is one of the most important things that you can do. But the impact of investing on your taxes can also be uncertain. Fortunately, these tips will give you a solid primer on what you need to know about taxes and your investments.
Keep Good Records
Modern day brokerages have pretty good transaction records but they’re not always perfect. It’s always good to have a backup transaction log of what you purchased – date, number of shares, and cost basis, to include commission and other fees. If there are mergers and acquisitions, or other similar company events, record the details for those as well.
Taxes Are Assessed On Realized Gains
For many new investors, it’s not clear how your investments are taxed. If you buy a stock and the value of it goes up, you do not have to pay taxes on those gains every year. You only pay when you “realize” the gain by selling the shares.
If you buy 10 shares of Company X for $10 and the stock jumps to $12, you don’t owe taxes on the $2 gain yet. It can continue to grow, without being taxed, until you sell it.
Investments go up in value but they can also go down. When you have an investment that goes down in value, it won’t have any tax implications until you sell your investment. If you buy 10 shares of Company Y for $10 and the stock falls to $8, you have a paper loss of $2 per share, but no real loss. When you go to sell, you will realize that loss.
Realized losses can be used to offset realized gains. In the above scenario, with Company X going up $2 and Company Y going down $2, you have a realized gain of $20 and a realized loss of $20, respectively. If that were all in the same tax year, the gain is offset by the loss and you owe nothing in taxes.
Long Term vs. Short Term
When it comes to your gains, there are two tax rates to know – short term capital gains and long term capital gains.
Your gains are taxed at the short term capital gains rate when you sell them and have held them for less than a year. Your gains are taxed at the long term capital gains rates when you sell them and have held them for over a year.
The short term capital gains tax rate is based on your income tax bracket rate. If you’re in the 22% income tax bracket, then short term capital gains tax rate is 22%.
Long term capital rates remain lower than your ordinary income rates at 0%, 15%, and 20%, however the rates are no longer tied to your ordinary income brackets.
Capital Losses Can Offset Income
If you have more losses than gains in a year, you can take $3,000 of those losses and apply it against your income, thereby reducing it. Any amount of loss over that $3,000 can be carried forward to future tax years indefinitely.
It’s painful to take a loss but if you must, it’s nice you can use it to offset higher taxed income.
Net Investment Income Tax
If you are single or head of household and make over $200,000 married filing jointly making over $250,000, or married filing separately the income threshold lowers to $125,000 and you may be subject to the net investment tax of 3.8%. This is an extra tax of 3.8% on net investment income above the threshold amount.
Don’t worry about knowing these tax rules. TurboTax asks you simple questions about you and gives you the tax deductions and credits you’re eligible for based on your answers. If you have questions, you can connect live via one-way video to a TurboTax Live CPA or Enrolled Agent to get your tax questions answered. TurboTax Live CPAs and Enrolled Agents are available in English and Spanish and can also review, sign, and file your tax return.