TAXES on Investments EXPLAINED – Stocks & Dividends

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April 13, 2020

Video Summary

Investing in the stock market can be a smart way to grow your wealth, but it’s essential to understand the tax implications of your investments. In this article, we’ll explore the different types of investments and how they are taxed.

There are three main types of investments that incur taxes: interest, dividends, and capital gains. Interest is the profit or cash you make from your checking or savings accounts, as well as from government bonds and CDs. Dividends are portions of a company’s profit that are distributed to its shareholders. Capital gains occur when you sell an investment for a profit or a loss.

It’s worth noting that there are tax-deferred accounts, such as IRAs and 401(k)s, which are not subject to taxes on the investments themselves. However, taxes will still be owed when you withdraw the funds in retirement.

As for interest, the interest is added to your taxable income and is taxed at your marginal tax rate. For example, if you earn $100,000 in taxable income, you would be taxed at a 10% rate on the first $9,875, 12% on the next $30,700, and 22% on the final $59,325.

Dividends from qualified investments, such as stocks and real estate investment trusts, are taxed at preferential long-term capital gains rates. However, if you hold the investment for less than a year, the dividends are taxed as ordinary income. There are also non-qualified dividends, which are taxed at your regular income tax rate.

Capital gains, on the other hand, are taxed when you sell an investment for a profit or a loss. Short-term capital gains, which occur when you hold an investment for less than a year, are taxed as ordinary income. Long-term capital gains, which occur after a year, are taxed at preferential rates ranging from 0% to 20%.

Losses can be used to offset gains, but there are certain rules to follow. For example, you can deduct up to $3,000 in losses against your ordinary income, and any excess can be carried over to future years. However, if you sell a stock at a loss and buy it back within a 30-day period, the loss will not be deductible. This is known as a “wash sale.”

In conclusion, understanding how your investments are taxed is crucial for making informed decisions. Whether you’re buying and holding or trading frequently, it’s essential to know how to minimize your tax bill and maximize your returns. By following the guidelines outlined in this article, you can make informed decisions and achieve your financial goals.