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Have you made money selling stocks or other investments? Don't forget to set aside some of your profits to pay your tax bill. Capital gains taxes apply to money you've made selling investments for more than you paid. How much capital gains tax you owe depends on how long you held the stock before selling it and your tax bracket. Read on for the details. What Are Capital Gains Taxes?Profits from selling a stock are considered a capital gain. These profits are subject to capital gains taxes. Stock profits are not taxable until a stock is sold and the gains are realized. Capital gains are taxed differently depending on how long you owned a stock before you sold it.
If you sold a stock for less than you paid for it, you may be able to report the loss on your tax return and reduce your overall tax bill. Long-Term Capital Gains Tax RatesLong-term capital gains are profits on investments held for more than a year. Depending on your tax bracket, the current long-term capital gains tax rates are 0%, 15% or 20%. Here's how rates break down by your income and tax filing status. Source: IRS Suppose you're single and your income for 2022 is $65,000. If you buy 100 shares of stock X for $4,000 and sell them for $6,700, your capital gain is $2,700. If you had owned stock X for more than a year, you would owe $405 (or 15%) in federal long-term capital gains tax on our hypothetical profit of $2,700. If your income was $500,000, you would owe $540 (or 20%) in taxes. And if your income was $40,000, you wouldn't owe capital gains tax at all. Short-Term Capital Gains RatesShort-term capital gains are profits on investments you've held for a year or less and are taxed as ordinary income. For the 2022 tax year, these are the tax brackets by income and filing status: Source: IRS Say, in our example, you turned a $2,700 profit on stock X in two weeks. Your short-term $2,700 profit would be taxed at the same rate as your regular income. So again, if you're single and your income is $65,000, your short-term capital gains are taxed at 22%. If your short-term capital gain causes your income to rise into the next tax bracket, the portion of your gain that exceeds your current bracket will be taxed at the higher rate: For example, if you earn $40,000 and have a short-term capital gain of $2,700, the first $1,775 is taxed at 12% and the remaining $925 at 22%. Additional Tax for High-Income TaxpayersHigh earners pay an additional 3.8% net investment income tax (NIIT) on either long- or short-term capital gains. Taxpayers earning more than the income threshold level will need to pay the additional tax. Income thresholds are as follows:
Source: IRS How Are Dividends Taxed?Dividends are income paid out to shareholders of a stock, mutual fund or other investment. They're typically paid quarterly or monthly, in cash or shares, and are taxable based on your income and the type of dividend paid.
IRS requirements for qualified dividends can be complicated. Fortunately, if you've earned dividends of $10 or more from any investment, you'll receive Form 1099-DIV or Schedule K. These forms report your dividend income as either qualified or ordinary dividends, so you don't have to make the distinction yourself. How to Avoid Taxes on StocksYou can't avoid taxes, but you can minimize them. One way is to hold on to investments for more than a year before selling them so you can take advantage of favorable long-term capital gains rates. Your broker (or brokerage software) should track this information to help you avoid selling stocks before their time. What if you're successfully making money on short-term gains? Even after taxes, short-term capital gains still put money in your pocket and are a net positive. Just remember to pay your taxes. Then again, most of us prefer a lower tax bill to a higher one. A few more ideas for keeping your tax bill down:
Additional Tax Information to ConsiderFinally, here are a few additional considerations to help you manage your stock-related tax bill with as little pain as possible. Quarterly Estimated TaxesIf capital gains will likely increase your tax liability by $1,000 or more, consider making quarterly estimated tax payments on any capital gains you have throughout the year. Quarterly estimated tax payments for the 2022 tax year are due on the following dates:
IRS Form 1040-ES can help you calculate your payment—or consult with your tax advisor. State TaxesYou may also be subject to state taxes on capital gains. Check with your state tax board for more information. Consult a Tax ProIf you're doing more than a few trades a year—or if you're even mildly confused about how these taxes apply to you—consulting with a tax professional may be wise. They can help you devise a tax strategy for your stock profits and keep you on track with any taxes you owe. Stay on Top of Your Tax BillCalculating and paying taxes on capital gains and dividends is definitely not the fun part of winning in the stock market. But understanding long- and short-term capital gains and dividends―and planning ahead to minimize and pay for your tax bill—helps make the process manageable. How can I avoid capital gains tax on stocks?9 Ways to Avoid Capital Gains Taxes on Stocks. Invest for the Long Term. ... . Contribute to Your Retirement Accounts. ... . Pick Your Cost Basis. ... . Lower Your Tax Bracket. ... . Harvest Losses to Offset Gains. ... . Move to a Tax-Friendly State. ... . Donate Stock to Charity. ... . Invest in an Opportunity Zone.. How do you calculate tax on stock gains?The difference between the purchase price and the sale price represents the gain or loss per share. Multiplying this value by the number of shares yields the total dollar amount of the transaction.
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