If you happen to be like me you are retired and living off your savings that you built up in working years. And some of you may have, not only an IRA, but also a taxable investment account. If that's true then this article is for you. I have been doing research into how IRS rules can affect your income from your taxable account. I wrote a previous article that dealt with income derived from dividend paying stocks, ETF's mutual funds and the like. You can find that article directly below this one.
In the rest of this article I will refer to stocks, ETF's, mutual funds and the like as Investment Property.
In this segment I want to discuss issues Dividend Growth Investors are faced with when dealing with Capital Gains and Losses. Income from capital gains are derived from sales of Investment Property that is sold at higher price than when purchased. And conversely, Capital losses are incurred when Investment Property is sold for a lower price than when purchased. The IRS has a set of special rules that apply to these gains and losses. If you do any buying or selling of Investment Property you would do well to get a copy of IRS Publication 550. A good understanding of this subject will help you lower your tax bill.
One of the most important aspects of buying and selling Investment Property concerns the holding period. The holding period determines whether any capital gain or loss was a short-term or a long-term capital gain. If you bought investment property and hold it for more than 1 year, any realized gain or loss will be considered a long-term gain or loss. Conversely, if you held the property for less than 1 year, any gain or loss will be considered a short-term gain or loss.
One thing you must understand about the holding period for Investment Property, the clock starts ticking the day after you make your purchase. So, make sure before you sell any property that 1 year has passed from the day after the purchase. Let's say you bought Investment Property on February 6, 2012. You would need to sell that property on or after February 7, 2013 for your holding period to be at least 1 year.
Why is the holding period so important? Because, long-term gains, tax wise, are treated more favorably than short-term gains. The tax rates on short-term gains can range from 10% to as high as 39.6%. If you can keep your capital gains long-term you pay as little as 0.0% to 20% tax rate. You can see that keeping your capital gains long-term could make a tremendous different in your tax bill.
One way to take full advantage of these rules is to make sure your "net capital gains" are always long-term. This, basically, means, if possible, to keep your short-term sales on the loss side and your long-term sales on the plus side.
Also, if you can keep your taxable income below $73,800 (if married) you will pay zero tax on your long-term capital gains. Compare that to a 15% tax rate if your gains are short-term. If your taxable income is less than $457,600 (if married) your long-term gains would only be taxed at 15%. With short-term gains you would be paying at a 35% tax rate.
If you happen to have a net capital loss it can be used to offset your some of your other income. There is a yearly limit $3000 that can be used to reduce your income dollar for dollar. If you have losses greater than $3000 you can carry over the unused part to next year and treat it as if you had incurred it in that next year.
This article certainly can't cover all the ins and outs of the capital gain or loss rules. It will be up to you to study the subject and then analyze your own situation. You than should be able come up with a strategy that will lessen your tax bill before next April 15th. Always if you have questions and no answers seek out a professional tax accountant or CPA.