Everything You Need to Know About The Top 5 Types of Investment Taxes

Chad Silver

Chad Silver

Managing Partner of Silver Tax Group, author of the book "Stop the IRS". Practicing a variety of tax issues, regulations, laws and rights. Specializing exclusively on tax matters involving IRS audits, negotiation, settlements & compromises.

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How to Manage Your Investment Taxes

Whether you’ve been investing for years or you just started last month, it’s important to understand investment taxes. Filing investment returns need to be done along with your annual tax return and are important to remember to take care of.

It’s much easier to file taxes correctly the first time than to struggle with amending your return.

1. Taxing Investments’ Dividends

When taxing dividends there are two types of dividends.

The first type is called non-qualified dividends. These dividends are taxed at the normal tax rate for your income bracket.

The second type of dividends is a little more complicated. These are called qualified dividends. Qualified dividends are classified as dividends which have been held for more than 60 days before the dividend is declared.

Qualified dividends receive a special tax treatment and are subject to either a 0%, 15%, or 20% tax rate. The assigned tax rate depends on your income.

Remember that if the dividend fund holds foreign stock, foreign taxes may have been deducted from your total dividend. In this case, the amount deducted can be used to reduce the U.S tax liability.

You should use form 1099-Div to file dividend taxes. 1099-DIV forms should be provided from each organization you receive dividends from. A good tax group can help you properly file your 1099-DIV Forms and maximize your return.

2. Retirement Investment Taxes

To properly file investment tax, it’s important to understand what type of retirement fund you have. Different retirement accounts have different taxes withheld. There are three main types of retirement accounts that individuals file for.

Filing for Traditional IRAs

For Traditional IRAs, any contributions made to the fund are tax deferred.  These contributions will be eligible for tax deductions. This is important to realize because it can help you to get a larger tax refund. Keep in mind that if you have an employer retirement fund you will not be able to claim these deductions.

Traditional IRAs have limitations on the number of deductions claimed. When filing the tax form, be sure to check for the latest limitations. Each year, new limitation information is published which can affect how many deductions can be made.

Filing for Roth IRAs

Roth IRAs are slightly different and are taxed on the contributions but not on withdrawals to the account. This allows you to pay taxes now and save money on them when you retire.

If you pass your Roth IRA onto a dependent, the dependent’s contributions will be tax-free. Be aware that this only applies if the original owner of the IRA owned it for 5 years or more. If he or she did not meet the time requirement, the dependent will still be liable for taxes.

In both cases, the form used when filing taxes is Form 5498. The IRS has detailed instructions on how to file these forms correctly.

3. College Savings Taxes

Saving for college is an important part of every parent’s life and can be intimidating. Did you know the government rewards you for it? If you have a college savings account, you can claim tax deductions.

529 College Savings Plan Tax Filing

When opening a college savings plan, keep in mind tax limitations.

529 college savings contributions are taxed the same way as gifts. For individuals, the annual savings contribution limit is $14,000. For couples, the limit is $28,000. The good news is that this is a large amount that parents can contribute tax-free.

If you want to contribute more than the contribution limitation in a year, don’t worry! You can still contribute up to $70,000. This just means that the contribution will be spread out over a 5 year period. Keep this in mind in the following years so that you understand how your future contributions will be taxed.

Education IRA Tax Filing

Education IRAs are a little bit different. Education IRAs are only available to individuals or couples in a certain income bracket. The income must be less than $110,000 for individuals and $220,000 for couples.

Education IRAs have an annual contribution limit of $2,000 per child. These contributions are not tax deductible.

4. Capital Gains Tax

Capital Gains are the income generated from the sale of stocks, bonds, or property assets. Capital Gains tax is calculated on the profit of investments when stocks, bonds, or property are sold. It is not calculated when there is a capital loss on investments.

Capital Gains tax rates vary depending on the length of time that an asset is held. Long-term capital gains are generated by assets that have been held by an investor for more than 12 months. Short-term capital gains are income from assets that have been held for less than 12 months.

How Long Term Capital Gains Tax Works

As of 2019, long-term capital gains tax is based on an individual’s taxable income. For individuals making less than $39,375, there is no capital gains tax due. For income greater than $434,551, the capital gains tax is 20%. If an individual makes between $39,375 and $434,551 he or she will have to pay 15% capital gains tax.

In certain situations, capital gains tax may be higher than these percentages, however. If a capital gain was generated from real-estate or art the capital gains tax can increase up to 28%.

How Short-Term Capital Gains Tax Works

Short-term capital gains taxes are much simpler to calculate. For short-term capital gains tax, the tax rate is the same as the individual’s ordinary income tax rates.

Keep in mind, while they seem similar, capital gains and dividends are not the same things. Dividends are payments by company owners to shareholders. Capital gains are direct profits from the sale of an asset by the investor himself.

5. Interest Income Tax

The final type of investment income is interest tax. Interest tax is a tax levied on interest earned from savings or investment accounts. Most interest income is taxed at the same rate as an individual’s income.

If interest income is generated from municipal bonds or private activity bonds, it is typically tax deductible. Certain dividends may also be exempt-interest dividends. These dividends will also be tax deductible.

Planning for taxes is difficult. It takes a lot of knowledge to understand how the government goes about taxing investments. Making sure you understand how to file for your investments will help make the most out of your tax return.

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