Investing & Taxes: Everything You Need To Know

Do you remember the feeling when you got your first paycheck? 

The excitement that came from seeing your hard work pay off in the form of actual money. 

The anticipation of ripping open the envelope, seeing all those numbers and deciding how you’ll spend your new fortune. 

Then…

Taxes. 

Simply put, they suck. 

Yes, they fund our public education system, roads and more, but it’s not fun to see that money leave before it even hits your bank account. Or for self employed people, it’s even harder to write that check and send it off to the IRS. 

As an employee, taxes are fairly simple. They come out of your check and every tax season you complete some paperwork and probably receive a refund. For anyone whose income is non-traditional though, things get more complicated. 

Self-employed individuals and people who earn money from investments need to be educated on their tax requirements, how they can save on taxes and more. 

Read on for the low-down, easy-to-understand details on everything investors need to know about taxes! 

Taxable Income 

While we often default to thinking about our income being taxed, the number one thing that investors need to know is so much more than that is subject to the government taking a percentage. 

Income can come in the form of dividends, interest, or even rent on real estate. Yep – you’ve got to pay taxes on all of those. 

But your capital gains (AKA profits from selling assets, like stocks!) are also subject to being taxed by the feds. 

Capital Gains Tax Implications 

The good news: Capital gains taxes aren’t paid until you sell the asset and make a profit, so you could be increasing your overall net worth by holding onto stocks and watching them grow. 

The bad news: the percentage you are taxed when you decide to sell and liquidate your profit is a complicated calculation with several contributing factors. Things such as how long you held the asset (short-term is taxed higher than long term), your tax bracket and additional income all factor into the percentage you’ll pay on any capital gains. 

Tax Tips for Investors 

While taxes are unavoidable, there are some tips that all investors should consider! 

1. Reinvest!

If you get paid dividends on any of your investments, it’s wise to reinvest that money because if the money goes back into the investment, it’s a capital loss, not gain and of course, losses are not taxed.

2. Keep Accurate Records

Trust me, I’d rather be jetting around the world than keeping records, but when you proactively keep accurate records (like how much in dividends you reinvested) you ensure you aren’t overpaying taxes or making an error that will cost you in the long run.

Pro Tip: don’t forget to track any broker costs you incur from investing. These commissions or brokerage fees should always be calculated into the overall amount you paid for a stock, which affects the eventual capital gain or loss associated with the stock. 

3. Invest in small business or being self-employed

There are sooooo many write offs for small business owners and self-employed individuals. Everything from a percentage of the cost of your vehicle to travel expenses can be written off as long as they are a part of doing business for you.

4. Look into Tax Free Investments

There are several ways that you can invest money in ways that are tax-free. Options such as 401(k)/403(b) Employer sponsored retirement programs, IRAs, health savings (HSA), exchange traded funds (ETF), municipal bonds, 529 education funds, U.S. savings bonds, 1031 exchanges, universal life insurance and charity are some of the main ones. 

Filing Your Taxes

There’s no right or wrong answer to the question of who should file your taxes. Thankfully, there’s enough options that you can pick the perfect one for your situation. 

If you feel comfortable filing your own taxes, then I say go for it. If you aren’t, don’t hesitate to seek professional help, whether that’s online or in-person. 

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