Sunday, February 09, 2020

Paying Taxes

     This post is a continuation of the $50 a month stock challenge I started October 14, 2019.  Click on, "No Commission Stock Trades", on the right side of the page to read from the start.

    I received an e-mail asking about taxes on a stock brokerage account. I am not a tax professional and never played one on tv.

     I have been filing my tax returns for over 50 years and I have had a taxable (as apposed to a IRA) brokerage account since 1996.  The rules, percentages, and numbers may change from year to year but the overall premise stays the same.

     You must pay taxes on your "net" realized stock gains (a.k.a. Capital Gains). You pay a slightly lower tax rate for long-term (over 1 year) gains as opposed to short-term (less than 1 year) gains. Any dividends collected are at a different rate.

     If you buy a stock and NEVER sell it, you will pay no "capital gains" because you have no "realized gain or loss" because you still own the stock. Any fluctuation in the stock are "unrealized gain or loss" because the selling price has yet to be determined.

     Buy a dividend paying stock and hold it and you only own taxes on the dividends paid to you. Given enough money, this way would be hard to beat. Spread your money around to several stocks and have a passive income. More on that much later.

     What are "net capital gains"? Capital gains - capital losses = net capital gains. It gets a little complicated with the whole long-term vs short-term losses. No need to worry about it, your brokerage tax report will show long-term amounts and short-term amounts. Tax software (used by you or your tax preparer) will do all the work for you.

     Capital Losses are further complicate by the "wash-rule" , this rule can really hurt you if your trading "triggers" it. Please click the link and read about it. I will dedicate a whole post to the subject making it simple to understand how to avoid it.

     Do not worry about this rule, just understand what "triggers" it and avoid doing it. SIMPLE!

     Just remember this can really cost you in extra taxes that can easily be avoided. How you handle your taxes determine how much money you get to keep.

Simple answer about taxes:
     Never "sell" based on taxes ALONE but
     Never "sell" without understanding the tax implication.
     Stocks should be sold according to stock performance and your goals, keeping in mind how it will effect your taxes.

     WOW, you have been in the stock market for 24 years, YOU MUST BE RICH. 

     No, I am not and the answer is two-fold.

     First: I am self taught (some lessons are expensive, lol) and finding what works (for me) took some time. Remember this is a small account.

     Second, I regularly withdrawn living expenses out of my account. I could ask why you are not rich from drawing a paycheck all those years, haha. Like me, you have probably needed that money to pay bills. 

     I have been retired almost 10 years and the extra income sure is nice to have.

Disclaimer, I am not a professional.

your comments are welcome and appreciated or 




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