Tax-Wise Investing in Your Regular Taxable Brokerage Account

We all know there are two guarantees in life: death and taxes. The government inevitably receives some form of tax revenue from your investments. There are two types of taxes levied upon the sale of a security (i.e., stock, bond, mutual fund, or ETF), known as long-term and short-term capital gain taxes.

Let’s take a closer look at capital gains and a few tips for building a tax-wise investment strategy.

What are Capital Gains?

When you sell an asset for a higher price than the original purchase price, your profits are called capital gains. These profits are taxed at various rates based on how long you’ve held the asset.

On the other hand, if your investment’s capital asset value drops from its purchase price, it’s considered a capital loss. A capital loss is recognized when you sell the asset at a discount to your purchase price.

Short-term vs. Long-term Capital Gains: What’s the Difference?

  • Long-term capital gains come from assets you’ve held for over a year. The current tax rate for the gains portion of the sale is 15% or 20%, depending on your tax filing status and taxable income.
  • Short-term capital gains are profits from selling assets you owned for a year or less. These are taxed as ordinary income. For example, if you are in the 37% tax bracket, you will pay 37% tax on your stock gains.

How are Dividends Taxed?

If you own stocks, you might receive periodic rewards from the issuing company, known as dividends. Dividends are money received during the year, meaning they are subject to tax in the year received.

Dividends are classified as either ordinary (i.e., taxable as income) or qualified (i.e., taxed as capital gains). Most dividends in the U.S. qualify to be taxed at the lower capital gains rate.

What is Tax-loss Harvesting?

Tax-loss harvesting is used to reduce or eliminate your taxable capital gains. With tax-loss harvesting, the IRS allows you to write off realized investment losses against your gains so that you will owe tax only on your net capital gain.

For example, if you realize a $10,000 gain on one investment but have a $7,000 loss on another, you can offset them for a taxable gain of just $3,000.

You also have a few options to defer taxes while you are working! Deferring taxes and allowing your money to grow over time is a fantastic method for tax-wise investing. You can do this by:

  • Contributing to a 401k through your employer. This provides an upfront tax break, as you won’t have to pay taxes until you withdraw your funds upon retirement.
  • Contributing to a Simplified Employee Pension (SEP) if you’re self-employed. Unlike a traditional retirement plan, an SEP has no startup and operating costs and allows contributions of up to 25% of your (and your employees’) pay!
  • Contribute to a Regular or Roth IRA. If you prefer to open a retirement account independently, you can decide whether to defer taxes upfront or grow your investments tax-free with post-tax dollars.

Tax-Wise Investing You Can Trust

Regardless of what type of assets you own, minimizing your tax liability should be an essential part of your strategy! If you need guidance on tax-wise investing, speak with a Carlson advisor today to learn how we’ll help set you up for a successful and comfortable retirement.

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