Investor's Tax Guide

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    Capital Gains Considerations

    • When investing, you have to consider the impact of capital gains taxes. If you sell a security such as a stock within a short period of time after buying it, you have to pay taxes on it at your regular marginal tax rate. If you are in the highest income tax bracket, this means you would pay taxes at a rate of 35 percent. By comparison, holding your stock for longer than a year can significantly reduce your tax bill. This makes the sale a long-term capital gain and you pay taxes at a rate of a maximum of 15 percent.

    Offsetting Gains

    • Many investors also use the practice of offsetting gains with losses. With the tax system, the Internal Revenue Service only looks at the total amount of capital gain or loss for the year. This means that if you have had a good year up until the end of the year, it may make sense to take a loss on one of your stocks. This way, you can offset some of the gains in your portfolio and lower your tax bill.

    Dividend Taxes

    • When you invest in the stock market, you may be entitled to dividends from the companies that issue them. When you receive a dividend, you may not have to pay taxes on them at the regular marginal tax rate. If your dividend is considered to be a qualified dividend, you can pay a cheaper tax rate of 5 to 15 percent. If the dividend is nonqualified, it will be taxed at your regular tax rate.

    Retirement Accounts

    • Using retirement accounts for your investing can significantly lower your tax bill for the year. For example, if you open a 401k or an individual retirement account, you can save money before taxes are taken out of your income. This allows you to lower your taxable income for the year. You also do not have to worry about paying taxes on the earnings inside the retirement account. You only pay taxes once you withdraw the money at retirement.

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