Be Mindful of Tax When Investing

As an investor, you should always think about tax when investing. When you invest, you are going to have to pay some type of taxes on the gains that you make. This means that you need to always be aware of the tax implications of every move that you make. Here are a few things to consider about the tax implications of investing.

Dividends and Interest

Two types of income that you can receive when investing are dividends and interest. Dividends are received when you are a shareholder in a company. Interest is received when you are an owner of a debt security such as a bond. With both types of income, you are going to have to pay taxes at your marginal tax rate. Therefore, before setting up this type of income, you will want to be aware of what your tax bracket is. If you are in the highest tax bracket, this type of income is going to cost you more than someone that is in the lowest.

Capital Gains

Another way that you can make money by investing is through capital gains. This occurs when you purchase stock and the value of the stock increases. Once the value increases and you sell the stock, you are going to have to pay taxes on the difference between what you paid for the stock and what you sold it for.

When it comes to capital gains taxes, there are two different ways that you could be taxed. You could pay short-term capital gains tax or long-term capital gains tax. If you buy a stock and sell it within a year, you are going to pay short-term capital gains tax. If you buy a stock and hold it for longer than a year, you are going to pay long-term capital gains tax. Short-term capital gains taxes are equal to your marginal tax rate. Long-term capital gains taxes are equal to 15 percent. This means that the IRS has set up the system to reward you if you hold your winners longer than a year. 

Minimizing Taxes

With this information in mind, you can minimize your taxes to a certain extent. Many investors will "harvest" losses at the right time in order to offset their gains. You can decide if you want to take a loss on your taxes in this year or in the next. Therefore, if you have a bad year trading, you could decide to save part of your losses until next year. For example, let's say that you had a $10,000 loss from trading this year. Instead of taking it on your taxes, you decide to hold it until next year. The following year, you have a $15,000 gain. This means that you will be able to offset $10,000 of that gain with your losses from the previous year. You would only have to pay taxes on the $5000 in this case. 

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