How are your investments taxed?
Edward Jones - Chad Choate, AAMS
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Jan 11, 2024
Florida - Sarasota, Bradenton & Charlotte Counties
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As
we begin the new year, you may be receiving various tax statements from your
financial services provider — so it’s a good time to consider how your
investments are taxed. This type of knowledge is useful when you’re doing your
taxes, and, perhaps just as important, knowing the type of taxes you generate
can help you evaluate your overall investment strategy.
To
understand the tax issues associated with investing, it’s important to understand
that investments typically generate either capital gains or ordinary income.
This distinction is meaningful because different tax rates may apply, and taxes
may be due at different times.
So,
when do you pay either capital gains taxes or ordinary income taxes on your investments?
You
receive capital gains, and pay taxes on these gains, when you sell an
investment that’s increased in value since you purchased it. Long-term capital
gains (on investments held more than a year) are taxed at 0%, 15% and 20%, depending
on your income. Also, qualified dividends — which represent most of the dividends
paid by American companies to investors — are taxed at the same rates as
long-term capital gains. (Keep in mind that you’ll be taxed on dividends even
if you automatically reinvest them.)
On
the other hand, you pay ordinary income taxes on capital gains resulting from
sales of appreciated assets you’ve held for one year or less. You also pay ordinary
income taxes
when
you receive “ordinary” dividends, which are paid if you purchase shares of a
company after the cutoff point for shareholders to be credited with a stock
dividend (the ex-dividend date).
Because
your ordinary income tax rate may be much higher than even the top long-term capital
gains rate, you may be better off, from a tax standpoint, by focusing on investments
that generate long-term capital gains. And the best strategy for doing just
that is to buy quality investments and hold them for the long term. By doing so,
you could also reduce the costs and fees associated with frequent buying and
selling.
The
investment tax situation has another twist, though, because not all ordinary
income is taxable — and if it is, it may not be taxable immediately. The most
common example of this is tax-deferred accounts, such as a traditional IRA and
401(k). When you take money from these accounts, typically at retirement, you’ll
pay taxes at your personal tax rate, but for the years and decades before then,
your taxes were deferred, which meant these accounts could grow faster than
ones on which you paid taxes every year. Consequently, it’s generally a good
idea to regularly contribute to your tax-advantaged retirement accounts.
Finally,
some investments and investment accounts are tax free. Municipal bonds are free
from federal income taxes, and often state income taxes, too. And when you
invest in a Roth IRA, your earnings can grow tax free if you don’t start taking
withdrawals until you’re at least 59½ and you’ve had your account at least five
years.
Ultimately,
tax considerations probably shouldn’t be the key driver of your investment choices.
Nonetheless, knowing the tax implications of your investments — specifically,
what type of taxes they may generate and when these taxes will be due — can help
you evaluate which investment choices are appropriate for your needs.
Chad
Choate III, AAMS
828
3rd Avenue West
Bradenton, FL
34205
941-462-2445
chad.chaote@edwardjones.com
This article was written
by Edward Jones for use by your local Edward Jones Financial Advisor.
Edward Jones, Member
SIPC
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Financial Advisor 828 3rd Ave. W., Bradenton, Florida, 34205Hello, I'm Chad Choate a dedicated financial advisor in Bradenton, FL, I began my career with Edward Jones in 2017. As a financial advisor, I want to find out what's important to you and help you build personalized strategies to achieve your goals. As a lifelong Manatee County resident, I graduated from the University of South Florida and was a teacher in Manatee County before joining Edward Jones. My driving force is to change people's lives in a positive way, and what better place than my home to do that. Whether you're planning for retirement, saving for college for children or grandchildren or just trying to protect the financial future of the ones you care for the most, we can work together to develop specific strategies to help you achieve your goals. We will also monitor your progress to help make sure you stay on track or determine if any adjustments need to be made. Throughout it all, we're dedicated to providing you with top-notch client service. But we're not alone. Thousands of people and advanced technology support from our office can help ensure you receive the most current and comprehensive guidance. In addition, we welcome the opportunity to work with your attorney, accountant and other trusted professionals to deliver a comprehensive strategy that leverages everyone's expertise. Working together, we can help you develop a complete, tailored strategy to help you achieve your financial goals. I currently volunteer with the Manatee Hurricane football Broadcast and Booster Club, serve on my church's trustees council and have previously served as a leader in Young Life. I am a member of the Manatee Chamber of Commerce and an alumnus of their Leadership Manatee program. I have been married to my childhood sweetheart, Ashley, for 15 years and we have a son, Wesley, and daughter, Camryn. We enjoy watching our children play their sports and traveling as a family.
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