How to Handle Taxes on Your Investments


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Tax time can send shivers through the spines of investors. Declaring investment income when filing taxes is crucial, but it can be complicated. This simple guide will help you handle taxes on your investment.

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When you make money stock trading or selling mutual funds, your profits are called capital gains. These gains are taxed at different rates depending on how long you hold the investments. The capital gains on short-term investments, held for less than a year, are taxed at your regular tax rate up to 37 percent. Capital gains on long-term investments, held for a year or more, are taxed at either zero, 15, or 20 percent, depending on your income.

On the flip side, investments sold at loss can reduce your tax burden. Deduct the amount of capital losses from your capital gains when filing.

Your investment brokerage will issue a 1099-B form showing your annual capital gains. Report your capital gains on Form 8949. You should also summarize your annual capital gains on Schedule D, along with selected other information if applicable.

Taxes on Income From Investments

Good investments generate income while you hold them. Stocks, mutual funds, and index funds pay dividends. The companies you’ve invested in will send you the total dividend amount on a 1099-DIV form. Bonds often pay interest. Financial institutions report how much interest you’ve earned on your Form 1099-INT, so long as the interest is more than $10. U.S. Treasury and saving bond interest is taxable at the federal level but usually exempt from taxes at the state level.

Municipal bond interest is tax-free at the federal level and at the state level, so long as your bond was issued in the state you’re living in. Private activity bonds, a type of municipal bond, are safe from ordinary tax but taxable for the alternative minimum tax. This tax is payable if your income is above the current ATM threshold.

Be sure to report all interest and dividends, including tax-exempt interest, on your tax forms 1040, 1040-A, 1040-EZ, and/or 6251.

Using Schedule B

If your interest and dividends total more than $1,500, you must tally them on the supplemental form Schedule B. While you don’t need to use this form if your investments have been less profitable, you can still use it to total your investment income for easy reporting on Form 1040.

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Prepare for a Tax Burden

Preparing for a tax burden is an essential part of good investment management. If you simply spend the money you make from your investments throughout the year without thinking about the tax it will incur, you may be in for a nasty case of bill shock. You can combat this by adjusting your withholdings by completing a new W-4. Alternatively, set aside the right percentage of interest, dividends, and capital gains as you receive them so you can hand it back when your tax statement comes in.

Handling your investment income at tax time can be intimidating at first, but once you get used to the process it will become second nature. If you’re nervous about the filing process, communicate with an accountant or financial adviser to ensure you’re handling taxes on your investments correctly.

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