Taxes on Stocks: What You Have To Pay and How To Pay Less
Investing in stocks is quite popular these days. The potential for profit is large and a savvy investor can make a big buck with a few key decisions. However, selling your stocks for a profit also means that you are going to need to pay taxes on that profit. There are two main tax categories that you need to understand: Capital gains tax and Dividend tax. Before you start Googling the best tax relief companies near me, it is in your best interest to understand taxes on stocks and how can you minimize them. Incidentally, all the information you might require, you can find right here in this article!
How are stocks taxed?
The only time you are expected to pay a tax for your stock dealings is either when you have made a capital gain or gotten money from a stock dividend. In general, you can expect your capital gains to be taxed at either 20%, 15%, or 0%, or by your normal tax rate. The amount you pay will largely depend on how long you held the stocks. If you have held them for less than a year, your ordinary tax rate will apply. The best way to figure out the exact numbers and protect your income from taxes is to hire a tax professional. Alternatively, you may want to continue reading and understand exactly how capital gains and dividends are taxed.
Taxes on stocks – Capital gains
Any time you sell a stock for a value that is greater than what you paid for it, you are considered to create a capital gain. You are expected to pay taxes on capital gains, according to your income. The IRS adjusts income brackets annually, and they differ depending on whether your capital gains are short-term or long-term. If you are looking to boost your tax refund amount, you will do well to fully understand the specifics. For most people, achieving a long-term capital gain is much more preferable, as they will most likely pay less in taxes.
This is due to the fact that there are different rules for short-term capital gains and long-term capital gains. Most of the time, if you sell a stock within less than a year of its purchase (short-term capital gain), the income from capital gains is treated as if it was your salary or a wage. For tax purposes, of course. Your capital gains will, therefore, be added to your earned income on your tax return. And, more importantly, will be taxed according to your income tax bracket.
As for long-term capital gains, taxes on stocks are different. If you happen to sell your stocks a year after their purchase, all of the profits will be taxed at either 0, 15, or 20 percent. Your capital gains tax bracket depends on your filing status and your taxable income. That being said, these tax rates are usually lower than tax rates for short-term capital gains.
Long-term capital gains tax rates
As mentioned previously, your tax bracket for long-term capital gains depends on your filing status and your income. Here are the three brackets, explained:
0% Tax rate on long-term capital gains – Single filers who earn up to $41,675, married joint filers who earn up to $83,350, and heads of households who earn up to $55,800. Married couples who file separately have the same conditions as single filers.
15% Tax rate on long-term capital gains – Single filers who earn from 41,676 to $459,750, married joint filers who earn from $83,351 to $517,200, and heads of households who earn from $55,800 to $488,500. Married couples who file separately will pay a 15% tax on capital gains if they earn between $41,676 and $258,600 each.
20% tax rate on long-term capital gains – Single filers who make more than $459,750, married joint filers who make more than $517,200, and heads of households who earn more than $488,500. Married couples filing separately need to earn $258,601 and up to fall under this tax bracket.
Short-term capital gains tax rates
There are seven brackets for short-term capital gains: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Here’s the full breakdown according to filing status and income levels:
10% Tax rate on short-term capital gains –
- Single filers earning up to $10,275.
- Married joint filers earning up to $20,550.
- Married separate filers earning up to $10,275.
- Heads of households earning up to $14,650.
12% Tax rate on short-term capital gains
- Single filers earning from $10,276 to $41,775.
- Married joint filers earning from $20,551 to $83,550.
- Married separate filers earning from $10,276 to $41,775.
- Heads of households earning from $14,651 to $55,900.
22% Tax rate on short-term capital gains
- Single filers earning from $41,776 to $89,075.
- Married joint filers earning from $83,551 to $178,150.
- Married separate filers earning from $41,776 to $89,075.
- Heads of households earning from $55,901 to $89,050.
24% Tax rate on short-term capital gains
- Single filers earning from $89,076 to $170,050.
- Married joint filers earning from $178,151 to $340,100.
- Married separate filers earning from $89,076 to $$170,050.
- Heads of households earning from $89,051 to $170,050.
32% Tax rate on short-term capital gains
- Single filers earning from $170,051 to $215,950.
- Married joint filers earning from $340,101 to $431,900.
- Married separate filers earning from $170,051 to $215,950.
- Heads of households earning from $170,051 to $215,950.
35% Tax rate on short-term capital gains
- Single filers earning from $215,951 to $539,900.
- Married joint filers earning from $431,901 to $647,850.
- Married separate filers earning from $215,951 to $323,925.
- Heads of households earning from $215,951 to $539,900.
37% Tax rate on short-term capital gains
- Single filers earning $539,901 and up.
- Married joint filers earning $647,851 and up.
- Married separate filers earning $323,926 and up.
- Heads of households earning $539,901 and up.
Net investment income tax
In addition to capital gains tax, high-income taxpayers also need to pay NIIT (Net Investment Income Tax). This tax applies to both short-and long-term capital gains. The income threshold to “qualify” for this tax is $200,000 for single filers, $250,000 for married joint filers and qualifying widows/widowers, and $200,00 for heads of households. The threshold for married couples filing separately is $125,000.
Taxes on stocks – Dividends
Aside from capital gains, you will also need to pay a tax for any income that comes from dividends. Dividends can be either qualified (ordinary) or qualified. The tax rate for ordinary dividends follows your income tax bracket whereas the tax rate on qualified dividends is either 0, 15, or 20%, depending on your filing status and taxable income.
Dividend taxes are quite complex, and you may need to hire a tax professional for your specific situation. Overall, however, you can expect to pay more taxes on dividends the higher your income tax bracket is.
If you want to try and understand all the special exceptions and rules that govern dividend taxes, the best thing to do is to read the IRS Publication 550. Furthermore, there are differences between how and when you own an investment that is paying dividends. Figuring out exact situations is, unfortunately, beyond the scope of this article.
Taxes on stocks – How to minimize them?
It is impossible to avoid taxes on stocks. What you can do, however, is try and minimize the amount you need to pay. There are four primary ways in which you can do so. You can think long-term, you can utilize investment capital losses and you can keep your stocks within tax-advantaged accounts.
Long term vs short term
The first thing you might want to do to lower your tax amount is to hold your stocks long enough for their dividends to count as qualified, as they have a lower tax rate. Also, to further cut your tax bills, you will want to hold your assets for longer than one year. This will qualify you for the long-term capital gains tax rate.
A word of caution, though, you may want to weigh these decisions according to your investment goals. It may so happen that paying a higher tax rate on stocks is a much better idea if it will provide you with an advantage elsewhere.
Investment capital losses
Another way that you can minimize taxes on stocks is by leveraging the “net capital gain”. If your overall losses happen to exceed your gains from other stocks, you can use the resulting “net capital loss” to offset up to $3,000 in ordinary income. For couples that file separately, this limit is $1,500. This is a very common strategy that is often used alongside other popular tax deductions, as this offset is available each year. You can even carry over any additional losses to the following years.
If your stocks are held within a traditional IRA account, they will be tax-deferred. And if you hold them within a Roth IRA, they are tax-free. Regardless, once you have the money in a 401(k) account (and as long as it stays there), there will be no need to pay any taxes on dividends, interests, investment gains, and investment growths. This is the primary reason why many people consider investing in stocks to be one of the key steps to retirement planning. There is also a possibility of converting a traditional IRA into a Roth IRA, and thus benefit from tax-free stocks but you will need to pay all the associated taxes for doing so.
Avoiding as many taxes on stocks as you can is always in your best interest. However, to do so, you will usually need to hire a tax professional. You can find all the best tax relief companies right here, at Consumer Opinion Guide. We will also provide all the information you might need to minimize your taxes and maximize your tax return!