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How to Determine Taxes Owed on Investment Assets

April 7, 2021 / by Andrew / Leave a Comment

According to one study, in 2018, the average American paid about $15,000 in taxes.

But what happens if you have real estate investments? Or other taxable assets?

Thankfully, we break down how to figure out what you owe on your investment assets and how to try and save yourself some money, so keep reading to find out how!

Mutual Funds

Mutual fund taxes normally include your taxes on dividends and capital gains that you have when you own the fund shares. However, you can also have capital gains taxes if you sell your fund share.

As you put more money into your mutual fund, it will create and send out dividends, capital gains, or interest from the fund. Because of that, you may end up owing taxes on these investments even if you haven’t received the cash or sold any of your shares.

The rate that these are taxed will depend on what distribution you get from the fund. You could also have to pay taxes if you sell your shares for a profit.

If you want to minimize how much you’ll be taxed on it, try and hold off for a year before you sell your shares. You could also try getting your mutual funds into a retirement account that will let you defer the tax on anything your fund distributes.

The only downside is that you won’t be able to take it out until retirement age. If you do take it out of a retirement account early, you’ll be taxed even more heavily.

Capital Gains

When you’re trying to figure out what your capital gains are, you’ll have to determine between your short-term and long-term.

Short-term gains you will hold for less than a year. These are taxed at an ordinary income rate. However, if you have long-term gains for more than a year, these will be even lower than your ordinary income tax.

They’re also usually maxed out at 20%.

There are certain investments that will have a higher capital gain tax rate. For example, collectible items that are worth a lot can be taxed as high as 28%.

There are a few things you can try to help save yourself some money though. First, you can try netting your capital gains and losses that are in the same category.

If you end up having any left, you can reduce your short-term losses with your long-term gains to help minimize the taxes.

Dividends

Dividends come from your stocks and bonds, and they are usually taxable for the year that you received them. Even if you didn’t get a dividend in cash and had it reinvested, you’ll need to report that as well.

There are two types of dividends: qualified and nonqualified. On a qualified dividend, you’ll have a low tax rate somewhere between 0 and 20%. For a non-qualified dividend, you’ll have to pay whatever regular income tax bracket you’re in.

You’ll get a 1099-DIV from your bank or broker at the end of the year. If you get this form, it means you made at least $10 in dividends or distributions. You’ll be able to find what kind of dividend you were paid on that form.

If you want to lessen the amount you have to pay back, try and hold your investments for a longer period of time. If you do that, you’ll be able to get a qualifying dividend, which means it’ll be taxed at a lower rate.

You could also try holding these dividends in retirement funds and not taking them out early so that you can use that money.

401(k)

Most people don’t have to pay any taxes on the money they put into a 401(k) as long as you don’t take it out. You pay the taxes upfront before it goes into that account, so even when you retire, the qualified distributions aren’t taxable.

If you take that money out before you hit age 59.5, you’ll have to pay a 10% penalty on top of whatever the tax rate is.

How to Figure Out Your Gain and Loss

While every investing account is different, there are two main ways that the IRS will figure out how much you owe them.

They’ll either use a cost or an average basis.

Cost Basis

A cost basis is good if you know how much you paid for the shares that you eventually sold off.

But if you have a lot of shares that you bought at different times throughout the year, this can be a very time-consuming method.

Average Basis

If you can’t figure out the specific price, you can get the average price of them. You’ll use the cost of all your shares as the basis for what you sold it at.

However, if you have mutual funds, they’ll need to be identical for you to use this method. That’s because with a mutual fund, sometimes they’re mixed.

If you have real estate investments rather than investing accounts, make sure that you check out this guide for real estate investors. If you aren’t familiar with either of these methods, make sure you talk to your accountant!

Learn More About How to Figure Out Taxes Owed on Investment Assets

These are only a few ways to figure out what taxes you’ll owe on your investment assets, but there are many more things to consider!

We know that filing your taxes and managing your finances can be overwhelming and stressful, but we’re here to help you out.

To read more on topics like this, check out the Money category

Filed Under: Money

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