Not affiliated with The United States Office of Personnel Management or any government agency

Not affiliated with The United States Office of Personnel Management or any government agency

Tax Basics for Investors – Aaron Steele

This article delves into tax choices such as dividend tax, interest tax, capital gains tax, and how harvesting tax losses can minimize capital gains tax.

Dividend tax

You are undoubtedly aware that firms pay dividends after paying tax on their original profits as business owners. This is why on “qualified dividends,” owners in the United States or nations with which the United States has a double-taxation treaty receive a preferential maximum tax rate of 20%.

On the other hand, foreign corporations and companies that get non-qualified income pay conventional income tax rates, which are typically higher.

According to the Internal Revenue Service (IRS), shareholders can only profit from the preferred tax rate if they have held shares for at least 61 days during the 121 days beginning 60 days before the ex-dividend date. Those days do not count against the minimum holding time when the shareholder’s risk of loss is decreased,

In the case of an investor who pays a marginal federal income tax rate of 35% and has a taxable account with a tax liability of $100, he receives a $500 dividend on stock. The tax rises to $175 if the necessary holding rate is not attained or the dividend is not qualified.

Investors that have assets in a deferred account such as taxable bonds, overseas stocks, and a conventional brokerage account where they keep domestic stock have decreased their tax burden.

Interest tax

Most interests are taxed by the federal government as ordinary income, depending on the investor’s marginal rate.

Interest bonds issued by states and municipalities in the United States are tax-free. Investors may also be exempt from state income taxes on interest. Most states do not charge interest on municipal bonds issued by in-state entities.

Municipal bonds are preferred by investors subject to higher tax brackets over other bonds in their taxable accounts. Municipalities with lower nominal interest rates typically give investors a larger after-tax return on tax-exempt bonds than firms with similar credit ratings.

Consider an investor who pays a marginal federal income tax rate of 32% and receives $1,000 in semi-annual interest on a $40,000 principal amount of a 5% corporate bond but owes $320 in taxes. If an investor receives $800 in interest on a $40,000 principal amount of a 4% tax-exempt municipal bond, then no federal tax is due on the $800.

Tax on Capital Gains

Investors cannot avoid paying taxes by investing in mutual funds, exchange-traded funds, real estate investment trusts, or limited partnerships. Because of the tax character of dividends, investors are still subject to capital gains tax when they sell.

Research shows that the tax on realized capital gains is based on how long the investor has owned the security. Long-term gains (greater than a year) are taxed at a rate of 0%, 15%, or 20%, depending on your taxable income and filing status. Days do not count if the investor has minimized risk by using options or short sales, just as they do for eligible dividends. Short-term capital gains (those held for less than a year) are taxed at ordinary income tax rates, often higher.

In the case of a 24% tax bracket, an investor selling 100 shares of XYZ stock for $80 each after obtaining them for $50 each—if they owned the stock for more than a year and are in the 15% capital gains bracket, the tax due would be $450 (15 percent of ($80 – $50) x 100), compared to $720 if they only held it for a year.

Wash Sales and Tax Losses

Investors can lower their capital gains tax liability by harvesting tax losses. For instance, if one or more stocks in an investor’s portfolio fall below their cost basis, the investor can sell and realize a tax loss.

Capital gains can be offset by capital losses incurred in the same tax year or carried over from previous years. Individuals can deduct up to $3,000 in net capital losses from their other taxable income each year. Any losses that exceed the tolerance can be used to offset gains in the future.

The federal income tax brackets for 2020 and 2021 are 10%, 12%, 22%, 24%, 32%, 35%, and 37%, dependent on the annual income.

However, there is a catch. The IRS considers a “wash sale” when a “substantially similar” security is sold and repurchased within 30 days, and the capital loss is forgiven for the current tax year. Instead, the loss improves the tax basis of the new position, deferring the tax payment until the stock is sold in a non-wash sale. The same stock, in-the-money call options, and short put options on the same stock are all deemed substantially comparable securities but not shares in another company in the same industry.

An investor in the 35% tax bracket, for example, sells 100 shares of XYZ stock purchased at $60 per share for $40 per share, a $2,000 loss, and sells 100 shares of ABC stock purchased at $30 per share for $100 per share, a $7,000 profit. Taxation is due on the $5,000 net gain. The rate is decided by how long ABC has been held—$750 for a long-term gain (if taxed at 15%) or $1,750 for a short-term gain (if taxed at 15%).

If the investor buys back 100 shares of XYZ within 30 days of the original transaction, the capital loss on the wash sale is rejected, and the investor must pay tax on the entire $7,000 gain.

Conclusion

Taxes are subject to change and can have a significant impact on an investor’s net return. Dividends, capital gains, and wash sales are all covered in detail on the IRS‘ website. Given the intricacy of these rules, investors should seek the guidance of their own financial and tax advisors to determine the best strategy for their investment goals and ensure that they are properly reporting their taxes.

Contact Information:
Email: [email protected]
Phone: 3604642979

Disclosure:
Disclosure:Investment advisory services are offered through BWM Advisory, LLC (BWM). BWM is registered as an Investment Advisor located in Scottsdale, Arizona, and only conducts business in states where it is properly licensed, notice filed, or is excluded from notice filing requirements. BWM does not accept or take responsibility for acting on time-sensitive instructions sent by email or other electronic means. Content shared or published through this medium is only intended for an audience in the States the Advisor is licensed in. If you are not the intended recipient, you are hereby notified that any dissemination, distribution, or copy of this transmission is strictly prohibited. If you receive this communication in error, please immediately notify the sender. The information included should not be considered investment advice. There are risks involved with investing which may include market fluctuation and possible loss of principal value. Carefully consider the risks and possible consequences involved prior to making an investment decision.Confidential Notice and Disclosure: Electronic mail sent over the internet is not secure and could be intercepted by a third party. For your protection, avoid sending confidential identifying information, such as account and social security numbers. Further, do not send time-sensitive, action-oriented messages, such as transaction orders, fund transfer instructions, or check stop payments, as it is our policy not to accept such items electronically. All e-mail sent to or from this address will be received or otherwise recorded by the sender’s corporate e-mail system and is subject to archival, monitoring or review by, and/or disclosure to, someone other than the recipient as permitted and required by the Securities and Exchange Commission. Please contact your advisor if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. Additionally, if you change your address or fail to receive account statements from your account custodian, please contact our office at [email protected] or 800-779-4183.

After entering the financial services industry in 1994, it was a desire to guide people towards their financial independence that drove Aaron to start Steele Capital Management in 2013. Armed with an extensive background in financial planning and commercial banking coupled with a sincere passion for helping people, Aaron has the expertise and affinity for serving the unique needs of those in transition. Clients benefit from his objective financial solutions and education aligned solely with
helping them pursue the most comfortable financial life possible.

Born in Olympia, Washington, Aaron spent much of his childhood in Denver, Colorado. An area outside of Phoenix, Arizona, known as the East Valley, occupies a special place in Aaron’s heart. It is where he graduated from Arizona State University with a Bachelor of Science degree in Business Administration, started a family, and advanced his professional career.

Having now returned to his hometown of Olympia, and with the days of coaching his sons football and baseball teams behind him, he now has time to pursue his civic passions. Aaron is proud to serve on the Board of Regents Leadership for Thurston County as the Secretary and Treasurer for the Morningside area. His past affiliations include the West Olympia Rotary and has served on various committees for organizations throughout his community.

Aaron and his beautiful wife, Holly, a Registered Nurse, consider their greatest accomplishment having raised Thomas and Tate, their two intelligent and motivated sons. Their oldest son Tate is following in his father’s entrepreneurial footsteps and currently attends the Carson College of Business at Washington State University. Their beloved youngest son, Thomas, is a student at Olympia High School.

Focused on helping veterans and their families navigate the maze of long-term care solutions, Aaron specializes in customized strategies to avoid the financial crisis that care related expenses can create. Experience has shown him that many seniors are not prepared for the economic transition that takes place as they reach an advanced age.

With support from the American Academy of Benefit Planners – an organization with expertise and resources on the intricacies of government benefits – he helps clients close the gap between the cost of care and their income while protecting their assets from depletion.

Aaron can help you and your family to create, preserve and protect your legacy.

That’s making a difference.

Disclosure: Investment advisory services are offered through BWM Advisory, LLC (BWM). BWM is registered as an Investment Advisor located in Scottsdale, Arizona, and only conducts business in states where it is properly licensed, notice has been filed, or is excluded from notice filing requirements. This information is not a complete analysis of the topic(s) discussed, is general in nature, and is not personalized investment advice. Nothing in this article is intended to be investment advice. There are risks involved with investing which may include (but are not limited to) market fluctuations and possible loss of principal value. Carefully consider the risks and possible consequences involved prior to making any investment decision. You should consult a professional tax or investment advisor regarding tax and investment implications before taking any investment actions or implementing any investment strategies.

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