Learn more about investment taxes from the information below. We discuss the treatment of dividends and capital gains, investment losses, and more. You'll also discover more about estimating your tax bracket and taxes and mutual fund distributions.
Estimate Your Tax Bracket
2014 Tax Brackets (Due April 15, 2015)
|Tax Rate||Single Filers||Married/Joint&Window(er)||Married/Separate||Head of Household|
|10%||Up to $9,075||Up to $18,150||Up to $9,075||Up to $12,950|
|15%||$9,076 to $36,900||$18,151 to $73,800||$9,076 to $36,900||$12,951 to $49,400|
|25%||$36,901 to $89,350||$73,801 to $148,850||$36,901 to $74,425||$49,401 to $127,550|
|28%||$89,351 to $186,350||$148,851 to $226,850||$74,426 to $113,425||$127,551 to $206,600|
|33%||$186,351 to $405,100||$226,851 to $405,100||$113,426 to $202,550||$206,601 to $405,100|
|35%||$405,101 to $406,750||$405,101 to $457,600||$202,551 to $228,800||$405,101 to $432,200|
|39.6%||Over $406,750||Over $457,600||Over $228,800||Over $432,000|
Other Tax Situations
|Cash in Lieu||Cash-compensation substituted for a fractional share after a merger or split.||The fractional shares must be factored into cost basis and the cash given for them must be reported as a sale on your tax forms.|
|Cash payment through mergers||Mergers can often result in a combination of new shares and cash for shareholders.||A tax professional should be consulted in order to determine how to treat these payments.|
|Dividend reinvestment||Cash dividends can go to your sweep account or they can be automatically reinvested back in company stock.||Even when dividend reinvestment is chosen, the cash payment received will be reported on the 1099-DIV. Likewise, once sold, profit on the stock purchased through the reinvestment will be taxed.|
|Mutual fund capital gains distributions||Proceeds paid after a fund manager sells securities within the fund.||These are reported on form 1099-DIV and are subject to short- or long-term capital gains tax depending on the fund’s holding period.|
|Money market mutual funds||These funds offer payments in the form of dividends, keeping the price per share at $1.00 whenever you buy or sell.||Gains are realized strictly through dividends and are reported on the 1099-DIV.|
|Stock dividend||Dividends paid through additional shares of stock rather than cash.||The new shares are factored into the original cost basis. Likewise, their holding period will be calculated from the original purchase date. These are not taxable until they’ve been sold.|
|Stock splits||Stock splits occur when a company decides to increase its number of outstanding shares. It does so by issuing more stock to current shareholders. Subsequently, the price of each share is reduced in proportion to the split so the value of your overall holding remains the same and your cost basis drops. Let's say you originally bought 10 shares of ABC for a cost basis of $20 per share. If ABC has a 2:1 split, you’ll be issued 20 new shares and your total cost basis will drop to $10.||Not taxable until shares are sold.|
|Worthless securities||Stocks that are no longer publicly traded or are issued by companies that have declared bankruptcy.||When you call or email us to remove the position from your account, you will be able to declare a capital loss. This will be reflected on your statement as a penny for the lot transaction.|
Taxes and Mutual Fund Distributions: What You Need to Know
The mutual funds you hold in your portfolio don't change much on appearance, but the positions within can change frequently during the course of the year as the fund managers close out positions that no longer meet the risk tolerance or objectives of the fund and begin realizing some gains. If you hold these mutual funds in a nonqualified account, get ready to pay taxes on the capital gains as well as any dividend or interest paid to the funds.
The Mutual Fund Pass Through
Any interest income, dividends, or gains made by a mutual fund are passed through to the shareholders. Shareholders are taxed on these various types of gains the same way they would be if they were for individual stocks in their account. For example, if a mutual fund receives qualified dividends, then each shareholder is responsible to pay taxes on their share of the qualified dividends. Likewise, capital gains made by the fund are taxed to shareholders just as long-term gains in their accounts would be.
What Doesn't Pass Through
Unfortunately for shareholders, losses within the mutual fund do not pass through and, thus, are not tax-deductible against gains.
How Tax Rates Apply
No matter what the source of the gain was, a mutual fund distribution is reported on Form 1099-DIV. It will be reflected on the form as a dividend, interest or capital gains distribution, and this will affect your tax liability.
- Long-term capital gain distributions are taxed at capital gains rates even if you bought into the fund less than one year ago.
- Short-term capital gain distributions are taxed just as ordinary, non-qualified dividends, which means they’re taxed at your ordinary income tax rate.
- Qualified dividend distributions are taxed at long-term capital gains rates, as long as you meet holding requirements.
- Taxable interest distributions are taxed at ordinary income tax rates.
- Distributions from a tax-exempt bond fund may be federal tax exempt, however the shareholder still must report them and may be required to pay state and local taxes on them.
By reviewing the prospectus and finding the turnover ratio of any fund you plan to buy, you can get an idea of the likelihood of having to pay on taxable gains. It’s not unusual for certain managed funds to have an 85 percent turnover ratio, ensuring distributions annually. Some funds have turnover ratios as high as 800 percent, resulting in unusually high commissions and fees within the funds as well as taxable distributions.
Could You Benefit from Taking a Loss?
It's never easy to commit to a loss. No matter how far a stock or other investment has sunk, you know that as long as you retain ownership, you still have access to future upside potential. Often, however, companies that have faced significant business disruptions are never able to recapture their former highs and investors who bought at the wrong time have no hope of recovering the unrealized gains their account balances once reflected.
If you have positions in your portfolio that don't hold much promise of regaining value then consider the benefit of liquidating them to take a strategic loss before tax season.
How Losses Impact Taxes
Investment losses can be written off against your gains. Even better, short-term losses are initially written off against short-term gains and long-term losses are initially written off against long-term gains, allowing you to choose the right position to liquidate to offer the most advantage for reducing capital gains tax liabilities.
Should your losses exceed your gains, you can offset your ordinary income by up to $3,000 as of 2014. If your losses exceed even that, you carry forward the remainder over to future years.
Finding Your Tax Loss Strategy
Here are some steps you can take to determine whether you would benefit by realizing your losses:
- At the end of the year, take a look at the gains you've made in your portfolio after selling positions.
- Determine how much of these gains are from long-term holdings and how much are from short-term holdings.
- Take a look at the stocks you have which are currently showing a loss or that are considered worthless.
- Separate the positions into short-term holdings and long-term holdings and, using today's price, see how much each loss would offset your capital gains.
Beware the Wash Sale Rule
The wash sale rule is an IRS regulation that prohibits investors from taking a deduction for a loss from a security if they've purchased the same security or a substantially identical security within the 30 days before or after the trade that resulted in a loss. It also prohibits investors from purchasing a call within that same time period.
Getting Your Deduction
In order to realize those losses and use them to offset your gains, the positions must be liquidated no later than December 31 of the tax year during which you want to take the deduction.
Capital Gains and Dividends
There are two sources of income you can get from the stocks in your portfolio: capital gains and dividends. Deciding whether to liquidate and realize capital gains or hold stocks that pay a dividend is no easy matter. While there are many considerations to make, non-qualified accountholders need to first think about the potential tax ramifications of closing out positions versus receiving dividends.
Tax Treatment of Capital Gains
When you sell a position you’ve held for one year or less, the gains are considered short-term and are subject to ordinary income tax rates, which can be as high as 39.6 percent (in 2014). When you sell a position you’ve had for longer than one year, the gains are subject to the long-term capital gains rates. These advantageous rates range from 0 to 15 percent, depending on your tax bracket.
Tax Treatment of Dividends
There are two types of dividends you can receive: qualified and non-qualified (also called ordinary). Qualified dividends are issued by for-profit companies in the United States as well as qualified foreign corporations. As long as you meet the holding requirements, you can expect to pay between 0 and 20 percent in taxes on qualified dividends, depending on your tax bracket.
Non-qualified dividends include those issued by REITs, tax-exempt companies and employee stock options. Unlike qualified dividends, these are not given any preferential tax treatment and are instead taxed at your ordinary income tax rate.
Factoring in Losses
When it comes to capital gains, the losses you realize in your portfolio (including those from worthless securities) can offer a strategic advantage against taxes, because capital losses can be offset against capital gains. These losses might not, however, impact the gains you made through dividends. The order for writing off losses is:
- Short-term losses are deducted from short-term gains
- Long-term losses are deducted from long-term gains
- Excess short- or long-term losses are written off remaining gains
- Remaining net loss (up to $3,000) is deducted from ordinary income
Therefore, only if your losses exceed your short- and long-term gains will you be able to deduct them from other income, and then only up to $3,000 (the rest can be carried forward to the next tax year).
The decision to sell or hold a dividend-paying stock will vary based on each stockholder’s unique set of circumstances. No matter how much you stand to gain from the sale—or lose without the dividend—you should always consider your potential tax liability before making a decision.