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Money Matters – Taxing Times: Taxes On Your Investments

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420x316-grad-lee Dee Lee
Dee Lee is a Certified Financial Planner who received a diploma in...
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BOSTON (CBS) –  Capital Gains: This is the money you make if there was a profit when you sell an investment!

Investments that you hold for less than a year and then sell are considered short term investments. If you made a profit it’s a short term capital gain and the profit is then taxed as ordinary income.

Investments that you hold longer than one year and then sell are taxed at a lower rate, a long term capital gains rate. If your gains come from stocks, bonds or mutual funds they will be taxed at 15%, but if you are in lower tax bracket, 15% or lower, then the gain will not be taxed this year. (0%)

But not all capital gains qualify for the lower rate even if you have held them for over a year. If your capital gain comes from investment real estate it will be taxed at 25%. And if you sold your collectibles such as oriental rugs or antiques and made a profit your capital gains tax rate is 28%. If you sold your household stuff at a yard sale last summer you will not owe taxes on the stuff you sold.

Capital Losses: These are losses on your investments. You use your losses against your gains. If you have a net loss you can use up to $3000 against other income and you get to carry any excess loss forward which is a good thing.

Dividends: Corporations share their profit with their shareholders when they pay dividends from either current income or retained income, which is taxable to the corporation. And once the shareholder receives it, it is taxable again for them. This is really double taxation.

Congress did make some changes but did not want to be perceived as helping the rich. So the double taxation did not go away, but the tax rate on dividends was reduced to 15% and for taxpayers in the lowest tax brackets it may be 0%.

Not all dividends qualify for the lower rate. Dividends paid by money market mutual funds or a Real Estate Investment Trust (REIT) generally do not qualify and will be taxed as ordinary income.

Other distributions often called dividends are really interest paid by co-op banks, mutual savings banks, credit unions, savings and loan associations.

These tax breaks for dividends and capital gains are not permanent. Congress reinstated them in December for two more years. They sunset, they go away, in 2012.

One more thing: Check IRS publication 550 for more help.

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