Investing is like planting a tree and hoping it will grow and blossom, giving you its best offerings in the future. It is definitely about making smart decisions regarding your hard earned money.
We are constantly tempted to splurge on shopping, cars and jewelry. Making an investment requires refraining from this instant pleasure of purchasing something new and shiny.
It’s about setting your priorities straight for the sake of a stable financial future.
Investment comes in many shapes and forms:
Stocks: buying a share in the ownership of a company gives you the chance to take part in the company’s success via increases in the price of the stock.
Bonds: lending money to a corporation in exchange for periodic interest payments.
Mutual Funds: this type of fund requires investors to pool their money together and invest this money in stocks, bonds and short-term debt.
Taxes go hand in hand with your earnings. There are customized rules according to each type of income. Below is a brief look at some common tax issues related to investment:
Taxes on Capital Gains
Capital gains are profits gained from selling a business, stock shares, a piece of land, etc. A capital gain is realized when this asset is sold or exchanged at a price that is higher than its original value.
These gains are categorized as long term if the asset was owned for more than a year, and short term if it was owned for one year or less. If you sell your asset within the first year, then the tax you’ll pay is at a rate of 35%.
People who own an asset for more than a year, pay a maximum of 15%. Homeowners do not pay taxes on profits they gained from selling their main residence. As for antiques and collectible items, they have a higher tax rate of 28%.
Taxes on Dividends and Other Income
Dividends come in the form of regular payments made by a company to its shareholders. This money is their share of the profits, so it also has its fair share of taxes.
There are certain dividends on stocks and stock mutual funds that are entitled to a maximum lower rate of 15%. On the other hand, income from rental property and most other sources of income via investment get taxed at higher ordinary rates.
The only exception are municipal bonds which are issued by local governments in different states in order to bankroll various programs.
What if you made an investment and you lost? Well, you can claim losses against any capital gains that you have. If your losses exceed your gains, then you can typically take $3,000 of losses against any other sources of income, your wages included.
Tax-Free Treatment for Favored Accounts
Making investments for other purposes such as investing for medical expenses is tax-free as long as you have a Health Savings Account.
College saving plans also get the tax-free treatment such as the 529 plan. In conclusion, knowing the basic on taxes gives you the key to build a portfolio that reduces the amount of taxes you need to pay.