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How are investments taxed?

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How are investments taxed? This is a very broad topic that can have even the most seasoned CPA pulling out their hair. If you have any type of investments you should have a general sense of what taxes you will be paying or those taxes that you need to pay.

Federal taxes come due every April and there are two ways that the IRS will tax any of your investments.

  • Capital gains taxes. This tax is for the sale of any of your assets. The money you are meant to pay taxes on is the profit you make from that sale. The sale of a home can be seen a capital gains tax as can the sale of any of your stocks. To find the amount of capital gains tax that you will need to pay you will need to know the original purchase price of the asset. Take that original purchase price that you paid for your asset and then subtract that price from the payment you received when you sold that investment. The taxes you owe will be the difference between the purchase price and the sales price and not the total sale amount.
  • Dividends. This is any money you have made throughout the year. These dividends are payments made by the corporations that you invested in as a shareholder. These dividends are paid to you, the shareholder, when that company earns a profit. If you have received any dividend checks from the corporation or your investment broker you are required to pay taxes on those dividends as income.

Checking with your tax adviser or investment broker to find out what taxes you will pay for state and local taxes for any capital gains or dividends. If you don't have a tax advisor and are unsure of what taxes you need to pay it is a good idea to find one to help you out. Having some help when it comes to investment taxes will help you from making costly mistakes by not paying enough or even not paying at all.

A tax adviser can also help you in deciding the best way to go about paying your taxes on your investments. They can help you keep more of the money you gained with those investments while still paying the taxes. This is commonly done for many investments including the capital gains tax.

To defer paying your capital gains taxes you will keep the money in a tax deferred retirement account like an IRA or a 401(k). You can also put that money into a tax sheltered annuity. Both ways will help you to pay fewer taxes and keep more of the profit from your investments. Deferring these payments should be done under the guidance of a tax adviser to make sure it is done correctly and you don't incur any penalties.

There are some investments that you will not need to pay taxes on all of your investments however. One of the investments that are tax free includes investments that are made from municipal bonds because the bonds themselves are not taxed by the federal government. Another investment that is tax free can include capital gains on money market funds because the price of the money market fund share remains the same amount of $1 but you will pay taxes if you receive any dividends from those money market funds.

How are investments taxed is complicated. Be sure to keep complete records of all your investments. Include the statements you receive from a bank or brokerage house in your records. Keeping good and complete records of these accounts will help you in preparing your taxes each year and to verify if you are ever audited.


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