Buying stocks can be a good path toward financial stability and additional income, but it’s important to understand how stock taxes affect what you owe the IRS. Any income you make when you sell stocks is taxable. Dividends from stocks are also taxable income.
Here’s what you need to know about taxes on stocks and some tips for how to reduce stock taxes.
What Are Capital Gains Taxes?
A capital gain is your profit from the sale of stocks you own, and this income is subject to capital gains taxes. If you have stocks in a brokerage account, you will pay capital gains taxes after selling your stocks at a higher price than you bought them.
There are two types of capital gains taxes depending on how long you owned stocks before selling them:
- Long-term Capital Gains Tax is for stocks you owned more than a year. Long-term capital gains tax rates are 0%, 15%, or 20% depending on your income.
- Short-term Capital Gains Tax is for stocks you owned less than a year. Short-term capital gains tax rates match your ordinary income tax rate.
If you sell stocks for less than what you paid to buy stocks, you can report a capital loss on your tax return to reduce your tax liability.
Are Dividends Taxable Income?
Dividends are considered taxable income by the IRS and can be taxed as either long-term capital gains or short-term capital gains.
There are two types of dividends:
- Qualified dividends are from investments in the US or qualifying international companies whose stocks you have had for 61 days or more of a 121-day holding period. Qualified dividends tax rates are similar to long-term capital gains tax rates.
- Non-qualified dividends are taxed at short-term capital gains tax rates. They’re often called ordinary dividends.
How Do I Reduce Stock Taxes?
Consider Long-Term Investments
If you wait more than a year after you buy stocks to sell them, you’ll benefit from lower long-term capital gains tax rates since the long-term rate is less than the short-term rate for most stocks.
Offset Capital Gains with Losses
When the amount of your losses is more than your gains, this is known as a net capital loss. A maximum net capital loss of $3,000 can be subtracted from your income each year. If your capital loss exceeds $3,000, you can carryover the remaining loss to the next tax year to offset new capital gains.
Invest in IRA, 401(k), or Other Tax-Advantaged Accounts
Once funds are in a 401(k), and they remain there, you don’t pay any taxes on interest, dividends, investment growth, or investment profits until you withdraw.
You won’t pay capitals gains taxes for Roth IRA’s since you’re investing after-tax money. Note that if you withdraw early from your Roth IRA, you’ll pay income taxes but not capital gains taxes. You also don’t pay capital gains taxes for traditional IRA’s, but when you withdraw you’ll pay income taxes. Remember capital gains and dividends in a brokerage account are not tax-free.
Donate Stock to charity
Donating stocks that you’ve had for over a year to a qualified charitable organization can be a tax deduction for the full amount of the shares. Plus, you avoid capital gains taxes in this scenario.
Sell Stocks When Your Income is Lower
Selling stocks when your income is lower can minimize your short-term capital gains tax rate when you’ve had the stocks less than a year. Also, the long-term capital gains tax rate is zero if your income is less than $41,675 (single or married filing separately) or $83,350 (married filing jointly).
What Do I Do If I Can’t Afford to Pay Tax Debt From Stock Taxes?
Finally, if you can’t afford to pay tax debt from stock taxes, the IRS offers multiple tax debt relief programs. You may even qualify to settle your tax debt from stocks for less than what you owe with an Offer in Compromise (OIC).
Call Wiztax today at (866) 568-4593 to learn more about how we can help.
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