Investing can be a great way to grow your assets, but what do you need to know when filing your taxes? As with most tax questions, the answer depends on your specific situation.
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There are usually two times your taxes are affected by your investments.
The first is that you get income from your investments. The second is when you sell your investment for a gain or loss.
Of course, there are possible exceptions, and TurboTax can help you determine if these apply to you when you complete your tax return.
Typically, investment income includes interest and dividends. Your income from interest and disqualified dividends is generally taxed at your ordinary income tax rate. On the other hand, certain dividends can receive special tax treatment, usually taxed at a lower long-term capital gains rate. Your investment brokerage firm should provide information on whether your dividends qualify.
Profit and loss on investment sales
When you get a gain, you usually only pay tax on the sale of the investment. To figure this out, you have to subtract the cost basis of the investment, usually what you pay, from the sale price to see if you have a benefit.
If you get a gain on the sale, you must check to see if you owe tax. If there is a loss, you can offset other gains or deductions depending on your circumstances.
To qualify, you must first sell the capital asset. Common examples of capital assets include:
your home furnishings investments, such as stocks or bonds
There are two general types of capital gains. Short-term capital gains are capital assets that you hold for a year or less. These gains are usually taxed at your ordinary income tax rate. Long-term capital gains are capital assets that you hold for more than a year. The long-term capital gains tax rate is usually lower than your ordinary income tax, usually up to 20%.
Certain types of investments have higher capital gains tax rates. The most notable exceptions are collectibles such as rare stamps, coins, art, etc. The capital gains tax rate on these types of investments can be as high as 28%.
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In addition to the above income taxes, those with substantial income may be subject to net investment income tax, which is an additional 3.8% tax on top of the usual capital gains tax.
Thankfully, if anything, you can offset your capital gains with your capital losses. As with capital gains, there are long-term and short-term capital losses. Using your capital losses to offset your capital gains may seem a bit overwhelming, but that’s how it works.
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First, you must net capital gains and capital losses of the same kind. This means subtracting short-term capital losses from short-term capital gains and long-term capital losses from long-term capital gains. If you end up with short-term or long-term capital losses, then you can reduce your short-term capital losses – your long-term losses versus your long-term gains, and vice versa. If you still have more capital losses than capital gains in a year, most filing states can use up to $3,000 of residual capital losses to offset your ordinary income. Any excess capital losses in excess of that amount can be carried forward to future tax years to offset future income under the rules above.
As long as you continue to file your taxes with TurboTax each year, TurboTax can track any carryover losses and apply them to your future tax returns.
Certain investments may have special tax treatment
Certain types of investments can have special tax treatment. For example, municipal bonds are generally exempt from federal income tax, but may be taxed on your state tax return, depending on the state where you live and the state that issued the bond you invested in.
Special taxes such as Alternative Minimum Tax (AMT) can also be triggered by exercising instances such as incentive stock options. TurboTax can guide you to determine if this applies to your situation. A bigger exception is money in tax-advantaged retirement accounts. A traditional retirement account, such as a traditional IRA or a traditional 401(k), may allow you to take a tax cut today. Investments in the account can then grow tax-free. When you withdraw money in retirement after meeting the age requirements, the money is generally considered ordinary income and you may be subject to ordinary income tax on that income. Another tax-advantaged retirement account that is treated differently is a Roth retirement account, such as a Roth IRA or Roth 401(k). You will not receive tax deductions for contributing to these accounts. However, the money can grow tax-free, and you can withdraw tax-free investment income, including investment income, when you retire after reaching age and other requirements.
There may be other exceptions depending on your specific investment and situation. TurboTax can help you navigate these more complex areas.
Types of Investing in Tax Software Can Help
Using tax software, figuring out what tax you owe on your investments is simple. We’ll ask you simple questions about your investments, you can easily import your investments, and we’ll search over 400 tax deductions to make sure you get every credit and deduction that qualifies.
With TurboTax, it’s easy to figure out what taxes are due on your investments. Here are some of the most common types of investments that TurboTax can help with:
Whether you own stocks, bonds, ETFs, cryptocurrencies, rental property income or other investments, TurboTax Premier has you covered. Filers can easily import up to 10,000 stock trades from hundreds of financial institutions and up to 4,000 crypto trades from top crypto exchanges. Increase your tax knowledge and understanding while paying your taxes.