If you invested and profited on platforms such as Robinhood, Webull, TD Ameritrade, E-trade, or any other brokerage account you’ll have to share some of your gains with Uncle Sam. If you received a dividend payout, sold a stock, and traded options this is also for you. IRS calls it capital gains. Here’s how you can avoid it or potentially pay nothing.
What are CAPITAL GAINS?
Capital gains occur when you sell an asset more than what you initially paid for it. This includes appreciated assets such as real estate, stocks, bonds, jewelry, and art. For example, let’s say you bought an Apple stock for $300 and a month later it increased to $500. Now, if you sell the Apple stock for $500 you received a capital gain of $200 and must pay taxes on the profit. Depending on your filing status and tax bracket you can possibly avoid the tax bill.
TAXES ON LONG TERM STOCKS
A long-term capital gain is when a stock has appreciated in value and was held for a year or more. If you file single and make up to $40,000 a year (including gains from an asset) then you would be exempt from a tax bill.
For example, you purchased an amazon stock for $1,000 and a year later it valued at $6,000. Let’s say you also made $35,000 as a school teacher. Your taxable income would be $40,000 ($35,000 + $5,000 amazon profit). As a long term gain you will pay $0 for that $5,000 profit. Here’s the same example but different numbers. For instance, that same school teacher made $45,000 and has the same gain of $5,000 from the amazon stock. The teacher will have to pay $750 (15% bracket) in capital gain tax because the total gain and working wage exceeds $40,000($45,000 + $5,000 amazon profit). If you’re married and the total combined income is less than $80,000 then you’ll owe $0 for the capital gain. Swipe through the brackets above for the rates.
TAXES ON SHORT TERM STOCKS
Short-term capital gain is when the appreciated stock is sold less than a year. This also includes trading options. Short term gains are taxed as ordinary income so if you made $100,000 working at the strip club and made short term investments (held less than a year) for $20,000. Your actual income would be $120,000 for that tax year and you would fall under the 24% tax rate. As listed above, the single person will owe $4,800 on that capital gain and $4,400 with the 22% tax rate if you’re married filing jointly. So go get married investors…
DIVIDEND TAXES
A dividend is when a company issues a bonus payout to it’s shareholders for owning a stock in which it’s determined by its board of directors. If you receive dividends from any company totaling $10 or more you’ll be issued a 1099-DIV form and will have to pay taxes. Investors will also have to pay taxes if they decide to reinvest their dividends as well.
REAL ESTATE
For my fixer upper investors, if you sell a home and made profit on it Uncle Sam would like a piece as well. The first $250,000 of an individual’s capital gains are nontaxable($500,000 if you’re married filing jointly) if you owned and lived in the home for two of the five years leading up to the sell (ways around it).
Let’s say, you’re filing single and you bought a house for $100,000 and sold it four years later for $450,000. That’s a $350,000 gain. So for the first $250,000 out of the the total gain will be exempted from taxes. However, you’ll have to pay for the remaining $100,000. The couple filing jointly would owe $0 because the gain is less than $500,000. Be sure to include receipts of renovations to lower your tax bill as well.
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