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How Stocks are Taxed and 5 Ways to Beat the Tax Man

How Stocks are Taxed and Helpful Tips to Legally Pay Taxes for Less!

The penalty for not reporting stocks on your taxes can be as high as 75% of what you owe up to $275,000 and even jail time. But that doesn’t mean you should be paying more than you owe! In this video, I’ll show you step-by-step to how stocks are taxed and give you five ways to beat the tax man and LEGALLY pay less in taxes! We’re talking how taxes on stocks work, today on Let’s Talk Money!

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TAXES! Isn’t this the last thing you ever want to talk about? Right? I mean, I consider myself early if I get my taxes done on April 13th instead of the 15th every year!

But you know we try to stay positive here in the Nation so I want you to think of this video, this topic of how stocks are taxed as an OPPORTUNITY.

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How Taxes on Stocks Work and How Much You Can Save on Taxes

Working in private wealth management, the first question our millionaire clients would ask…the very first, was how much can you save me on taxes. Not what are the best investments but how to keep the government out of their pockets!

That’s what I’m going to show you today, how to keep as much of your money as possible. We’ll start with how taxes on stocks work and how to lower your tax rate by as much as 17% immediately. I’ll show you how dividends are taxed and how to keep every penny instead of splitting it with the tax man. I’ll also show you how to calculate your taxes on stocks and what the platforms like Robinhood tell the IRS. Stick around because towards the end of the video, I’m going to reveal five strategies I used with private wealth clients to defer, lower and cut out investment taxes altogether!

I also want to get your opinion though, of the five tax saving strategies I’ll share later, which do you think will save you the most money or do you have a better strategy to save more? So check those out, scroll down and let me know in the comments below, which is the best tax strategy for stocks?

On to the good stuff though and helping you keep more of your money though Nation because taxes can leave you broke. We had one client in the firm I worked with, a younger guy in California, that was paying almost 42% of his investment gains to taxes! Almost half of his money, he lost over $284,000 to taxes in the year before we used some of these tax strategies, a lot of that profits from trading stocks and bitcoin.

Stocks are Taxed in Different Ways

how stocks are taxed

Stocks are taxed in a couple of different ways and this is really how the tax man gets you because the confusion will cost you money.

How much you pay in taxes on your stocks depends on two things, how long you hold the stock before selling and your income for that year. You’ll never owe taxes on a stock until you sell it, so it starts with that and I’m going to use this chart to guide you through how stocks are taxed.

We start with the question of did you sell any stock or collect dividends. We’ll look at dividend taxes in the next section so we’ll move up here to taxes you pay on stocks you sold last year.

For each stock you sold, you have to separate into one of two groups. Stocks you owned for less than 365 days, that’s the short-term holding period, and those you held for 365 days or longer, the long-term holding period.

For each of these groups, you’re going to add up all your stock gains and losses. It doesn’t matter how much you made or lost in any one stock but your total gain or loss in short-term holdings and long-term holdings.

Now if you did have any losses in either of these two groups, let’s say you made $5,000 profit in all the stocks you held for more than a year but on the stocks you traded, you lost a total of $2,000. You then subtract that short-term loss from your long-term profits and only pay taxes on the remaining long-term profits. If you had profits in both short-term and long-term holdings then you’ll pay different taxes on each so let’s take this a step at a time.

If you had short-term trading profits, or if you don’t have enough losses in that long-term holding group to offset all your short-term profits, then you’re going to add the profit amount to your income and pay taxes at your normal income rate.

That’s something a lot of new investors don’t realize, all that stock trading or bitcoin profits you made last year are taxed at income rates which can be very high. Here are the income tax rates for single and married filers and you see, these can get insanely high especially if you made a lot of money in one year on the big jump in bitcoin or Tesla. You might have only made forty- or fifty-grand in regular income but if you made a $100,000 windfall in Tesla, that’s going to bump you up into the 24% tax bracket and cost you a lot more on those short-term profits.

It’s also why short-term trading doesn’t always make the money you think it does. After the tax man takes his share at those higher rates, you’re only getting a fraction of the return you thought you had.

Now on the other hand, for the stocks you held for more than a year before selling, those are taxed at a different rate called long-term capital gains.

Here again, you’re going to add up all the profits in these long-term stocks you sold and a loss can be used to offset some short-term gains if you made them. Another note here, If you had a loss in stocks you sold last year, in both of these short-term and long-term categories combined, you can take up to $3,000 of that and deduct it from your normal income to save you money on taxes.

If you had more than $3,000 in losses then the rest you save over for next year’s taxes to subtract against any profits. This is why it is SO important to keep track of your investment gains and losses each year and from year-to-year. Nation, do not miss out on these tax breaks you get from losses or from planning your stock trades.

And I know this is a lot at first but stick with it because it’s actually pretty easy once you figure out the basics and it will literally save you thousands of dollars!

Now if you had profits from stocks you sold that you held for more than a year, your tax rate on these long-term capital gains will depend on your income level. Here you see the capital gains tax rates and understand, these aren’t progressive rates like with income.

Remember, for income taxes, you pay the tax rate at each level on that much income. So if you made $45,000 income after deductions then you would pay 10% on the first $9,875 then you’d owe 12% on the amount of income between $9,876 and $40,125 and then pay 22% on the rest of your income. Your total taxes owed would come out to $5,690 or about 12.6% effective tax rate.

That’s not the case with long-term capital gains. Here you pay one rate on all your long-term profits. So if you made $45,000 in income then you owe 15% of your profits in taxes.

This is why good tax planners make so much money! It takes some strategy and I’ll share five of the best tax tips you can use later in the video but there are ways to get around this folks. PLEASE take the time here and DO NOT pay more in taxes than you should.

It does get better and later I’ll show you a selling strategy that will help you reduce your total tax bill even lower and pay no taxes on your investments.

How Dividends are Taxed

Now I’m going to show you how dividends are taxed along with what Robinhood and other platforms are telling the IRS about you, but first I want to personally invite you to a free webinar to share the custom investing strategy I developed working with private wealth clients. It’s totally free and will show you step-by-step to creating an investing plan perfect for your goals.

how stocks are taxed for dividends

Now the other side of taxes on stocks is from the dividends you collect and this can get expensive because you have less control over when you collect dividends compared to selling your stocks. You owe taxes on dividends you collect EVERY year, whether you sell the stock or not. If you collect a dividend, then when tax time comes around next year, you owe taxes on that dividend.

Just like with capital gains, there’s a difference in the taxes you pay on dividends depending on how long you own the shares. But here it’s not the 365 day rule but a 60-day period and it’s a little wonky how you calculate this so I’m going to show you an example.

The IRS says any dividend stock you hold for at least 61 days around that ex-dividend date, qualifies for a special long-term tax rate. And when you buy or sell the stock doesn’t matter as much, only that you hold it for that 61 days either before or after the ex-dividend date.

It’s usually not an issue for most dividend investors because you’re not selling your stocks. You’re holding and waiting to collect the next dividend, and the next and the next. This really only applies if you sell a dividend stock.

How Much Stocks are Taxed Depends on How Long You Hold the Investment

Now if you do collect a dividend and sell the stock without holding the shares for at least the 61 days, the dividend is what’s called non-qualified and will be added to your regular income for taxes. It’s easy to understand if you think of it in the same terms of those short-term stock holdings. Any short-term holding of a dividend stock, holding the shares for less than 61 days, then the dividend is added to your income at those higher rates.

For most investors, if you’re holding your dividend stocks longer than that 61 day period, any dividends you collect are called qualified dividends and it comes with a lower tax rate. For qualified dividends, the tax rates are the same as for those long-term capital gains. You either pay zero, 15% or 20% on the dividends you collected that year depending on your income.

So you see, a lot of what determines how much stocks are taxed depends on how long you hold the investment. This is something a lot of people didn’t really understand when they were trading in and out of the hot stocks of last year or in bitcoin. This kind of stock trading, where you own a stock for less than a year, it’s going to mean higher taxes and that has to factor into your decision.

We’re almost to those five strategies to save thousands on your taxes on stocks but I want to clear up some misconceptions about what Robinhood and other platforms report to the IRS and what happens if you don’t report stocks on your taxes.

how stocks are taxed

You Pay Taxes When You Sell a Stock or Collect a Dividend

As we’ve talked about, you pay taxes anytime you sell a stock or collect a dividend. So if you own dividend stocks, you’re going to owe taxes on that every year whether you sell stocks or not. If you sell even one share then there’s going to be taxes owed if you made a profit from how much you paid and what you sold it for.

Now just like your income taxes, you pay investment taxes in the following year. So any dividends collected or stocks sold in 2020, you file those on your taxes in 2021.

One of the most frequent questions I get from investors is, what does Robinhood or other stock platforms report to the IRS? What information is my broker sharing with the IRS for taxes?

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Why You Need to Report All Your Stocks and Dividends on Your Taxes

Any stock trading platform on which you collect dividends or sell shares will send the IRS what’s called a 1099 Form each year and they’ll send you a copy as well. You’ll get a 1099-DIV that shows dividends received, both qualified and non-qualified, and you’ll get a 1099-B that will show your gains and losses on stocks you sold.

The 1099-DIV showing your dividends collected is pretty straight forward. You can see here, I only collected qualified dividends last year but if I had any non-qualified dividends, they’d be show on another line. I just take the amount for each type of dividend and put it on my tax forms.

Here the 1099-B you receive will first summarize all your short-term and long-term capital gains, breaking each out for you and adding everything up. Even though most platforms make it easy like this, you should still double-check with each stock you sold to make sure the totals add up right. Most brokers will also list out individually each stock you sold as well.

So you see, it’s not like you can just not report something to the IRS for your taxes because they’ve already got a copy of what Robinhood or another platform is saying. Not reporting your stocks on taxes can trigger an audit. That’s where the IRS looks at your entire tax form and could give the tax man other things to look besides just what you reported in stocks. So unless you want to spend a week frantically going through boxes of receipts to present at your tax audit…report all your stocks and dividends on your taxes!

5 Strategies That Will Save You Thousands on Taxes

I know it’s a lot to cover and you might have to review some of this before you really understand the basics of how stocks are taxed, but now I want to share those five strategies that will save you thousands on your taxes.

how stocks are taxed -strategies

Understand here that we’re not talking about cheating on your taxes. Everything I’m about to show you is totally legal and how the rich lower their tax bill to nothing while the people that can’t afford high-priced tax accountants, while they pay this country’s tax bill.

Some of these strategies will help you lower your tax bill, some will make it so you don’t have to pay for years and some will cut those taxes completely!

First here, put all your highest yielding dividend stocks in a retirement account. You’re going to owe taxes on those dividends you collect every year whether you sell the stock or not…that is, unless you receive the payments in a retirement account like an IRA or 401K.

Dividends received in a retirement account aren’t taxed until you take the money out in retirement so you keep the entire dividend and get to earn returns on it for decades.

So list out the dividend stocks you buy in order of highest yield and max out your retirement contributions on those with the higher payouts. Because of contribution limits, you might not get all your dividend stocks in a retirement account but make sure you get the big payers in there!

Next here is a great one if you itemize deductions, using a Remainder Charitable Trust.

This is one of the biggest tax strategies we used in private wealth. Here’s how it works. Instead of selling a stock, you donate it to what’s called a Remainder Charitable Trust. The trust holds that money and pays you an interest rate, usually between 5% to 8% a year on the amount, for as long as you live then keeps whatever is left.

Why this is such a great tax strategy is you get an instant deduction on your taxes from the full amount you donated. Say you would have sold $10,000 in stock with a long-term capital gain of $5,000 and you’re in the 20% cap gains bracket. That means you would have owed $1000 of taxes on those stock profits.

Instead, you get to take the full $10,000 off your income which is actually going to save you about $3,500 in income taxes depending on your rate. So you’re already saving nearly five grand but BUT and here’s the kicker, you also get that $500 or more payment every year from the Trust! You’ve got a guaranteed income stream for life plus the tax benefits!

Our next tax strategy, choosing which stocks are sold through your broker and I’ll show you how to do this on Robinhood.

The problem here is when you sell shares on Robinhood, or most other platforms, it uses a first-in, first-out rule for selling the shares. For example if you own 500 shares of Apple that you bought over different times, say 100 shares a month, if you sell 200 shares then Robinhood is going to sell those first 200 shares you bought.

Now most of the time, if the stock price has increased, that’s going to mean higher taxes owed. Those first shares you bought were probably the lowest price so you’re going to owe the most capital gains tax when you sell them.

There is a way to change this rule though. You can tell the platform to sell the newest shares you bought, the highest price ones, and that’s going to mean the capital gains you report won’t be as high or maybe even can give you a deduction.

On some platforms, it gives you the choice of deciding which shares you sell when you place an order. Robinhood doesn’t make it so easy but they do allow the change and here’s how. When you sell some of your shares in a stock and you want to change it to newer shares you bought at the higher price, contact customer support through the Robinhood Help Center page. Here, tell them the sell order you placed and which specific group of shares you want sold. An important note here, this has to be done within two days of making the trade, that’s the settlement date. It’s best to just do this right after you sell the shares.

It might seem like a lot of work but it can significantly reduce your taxes in any give year if you’re selling the higher price shares you bought instead of the older ones. Of course, understand that you’ll still have those lower cost shares in the account and will pay taxes on that eventually but not until you sell so it’s a great way to defer the bigger tax bill until years into the future.

This one might not sound like a tax saving strategy but can be HUGE, thinking twice about short-term trading.

Nation, I know those quick trading profits can be tempting but once you pay the taxes, a lot of times you haven’t made anything.

For example, for someone in the 32% income tax bracket, you’re paying double the taxes on short-term trading as you would long-term gains. Say you made a quick 10% or $1000 on a $10,000 investment but after paying the 32% income tax on it, you really only made a 6.8% return. So you’ve got to ask yourself, especially at the higher income tax brackets, is it really worth stock trading if Uncle Sam is going to take such a big chunk of my profits?

Instead, just keep your stocks for at least the year time period and save that extra money with the lower long-term capital gains rates.

Free Webinar – Discover how to create a personal investing plan and beat your goals in less than an hour! I’m revealing the Goals-Based Investing Strategy I developed working private wealth management in this free webinar. Step-by-step to everything you need for this simple, stress-free strategy. Reserve your spot now!

Also here, track your gains and losses through the year and use tax loss harvesting.

This idea goes beyond just taking losses against your gains to lower taxes owed. With tax loss harvesting, you can go further and completely eliminate taxes for that year. How this works is you track those gains and losses so you know how much in total gains you have through the year. Then before the end of the year, you sell enough of a losing investment to offset any gains.

I usually do this planning early December, finding which stocks I can sell to produce enough of a loss to cover my gains. The best part is, since you can designate which specific shares you want to sell, you can sell a part of your investment in a stock, maybe the newest shares you bought at the higher prices that will give you the biggest loss, and you can still be holding the rest of the shares in a company. It doesn’t mean you have to sell completely out of your investment in a company.

These tax tricks are something that the government does not tell you but you can actually and absolutely legally use to cut your taxes. Strategies like tax loss harvesting, using charitable remainder trusts and putting dividend stocks in a non-taxable account can save you thousands of dollars in taxes every year.

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