How are Investments Taxed ?
Published on Mar 01 2010 // Written By Tushar Mathur // Personal Finance, Taxes
Nobody likes a surprise from Uncle Sam at tax time. When it comes to taxes on your investments – like capital gains and dividend income – this rundown will start you off on the right foot.
- Capital gains taxes - You sold an investment at a profit in 2009; great! The tax rate on that profit mostly depends on how long you held that investment.
- Dividend income tax - Even without selling any investments, you might owe taxes on your investments. Generally, if you earned dividends from securities you owned in 2009, those dividends are taxable. If you had capital gains, dividend income, or both in ’09, you’ll see these amounts on a 1099 form provided by your broker.
- The $10 exemption - One handy thing to know: if all your 2009 capital gains and dividend income come to a grand total under $10, you won’t owe tax.
- Trimming taxes for 2009 - You may be able to cut your ’09 taxes by funding a traditional IRA before April 15. Most people can contribute up to $5,000. (Better to keep it than give to the tax man!)
- More ways to trim - The two simplest ways to lower investment-related taxes are:
- Hold securities longer than a year
- Contribute to tax-advantaged retirement or education account.
| Length of investment | Tax rate |
| Owned it <> | Same as regular income |
| Owned it ? 1 year | No more than 15% |
| Owned it > 5 years, but purchased it after 1/1/2001 | No more than 10% |
No matter your situation, you should talk to your tax advisor. Taxes are never simple, so walk through your own situation with them.
