It’s easy to forget that while investing can bring us financial freedom, it comes with many other responsibilities. We need to pay taxes on our investment earnings just like any other source of income.
If you’re looking to dip your toes into the investment world, our experts at Accounting & Tax Advisers CPAs, Ltd. have put together a few things you need to know about investing and taxes.
The Basics of Capital Gains Taxes
Whether you’re investing in a mutual fund or some stock, any asset that you sell for more than you paid for is called a capital gain. The IRS considers this income, and you’ll need to pay taxes for it.
Short-term capital gains are taxed at your regular income tax rate, while long-term capital gains receive a lower tax rate. This is because the government wants to incentivize investors to hold assets for longer periods.
For example, if you’re in the 25% tax bracket, you’ll pay 25% taxes on your short-term capital gains. But if those same gains classify as long-term, you’ll only pay 15% in taxes.
Whichever investment strategy you choose, be sure to keep good records! You can also consider getting CPA services in Elmhurst if you need help with keeping track of purchases and sales as well as properly filing for taxes.
Tax Loss Harvesting: When Your Tax Losses Mean a Bigger Tax Break
Selling an asset for less than its original price is known as a capital loss. Just like with capital gains, you’ll need to report these losses to the IRS.
However, the government allows you to write off up to $3000 of capital losses each year. This can help reduce your taxable income and save you money on your tax bill. Note that if your total losses exceed $3000, you can carry over the rest to future years.
Tax-Advantaged Accounts: A Little Extra Help from the Government
There are also a few tax-advantaged investment accounts that can help reduce your taxable income. The most common are 401(k) and traditional IRA plans.
Contributions to these accounts are made with pre-tax dollars, which can help reduce your taxable income. Plus, you’ll get a tax break when you withdraw the money in retirement. Another option to consider is health savings accounts (HSAs). These work like IRAs but for health care expenses only.
We hope that this blog post has helped you understand the basics of investing and taxes. If you’re someone who owes tax from your investments or would like to know the tax implications of working remotely, Accounting & Tax Advisers CPAs can cover all your bases. Call us at (630) 932-9600 today.