How Stocks and Shares are Taxed in the U.S.
How Stocks and Shares are taxed in the U.S.
How Stocks and Shares are taxed in the U.S.
A quick and easy guide to how your US stocks can be taxed and how you can reduce those taxes!
As an individual investing in stocks and shares in the U.S., it is important that you are aware of they are taxed and how this will affect your tax bill.
Tax On Dividends
Dividends usually come under taxable income. Ordinary Dividends, also known as "non-qualified dividends", are taxed at standard federal income tax rates.
Whereas a qualified dividend will be taxed at the capital gains rate of tax.
Therefore, the qualified dividends are taxed at rates 0%, 15% or 20% for 2020, depending on income and filing status.
- If your taxable income is $0 to $40,000 your qualified dividends will be taxed at 0%.
- If your taxable income exceeds $40,000 up to $441,550, your qualified dividends will be taxed at 15%
- If your taxable income exceeds $441,500 you will pay 20% tax on your qualified dividends
These figures are based on the tax year 2020 and if you are a single filer, for which your tax return must be filed before the deadline, 15 April following the tax year.
If you have qualified dividend income then you will obtain the advantage of a lower tax rate rather than pay tax on your dividends at the standard federal tax rates. In order for your dividends to become qualified dividends and pay a lower rate of tax, you have to hold onto your ordinary dividends until they become qualified dividends.
By owning the security for more than 60 days within the 121 day period that began 60 days before the ex-dividend date means that your dividend will be qualified. The ex-dividend date is the day on which the stock begins trading (the day you own it) in order for you to receive the dividend.
Therefore in order to reduce your tax bill, you may decide to hold on to your ordinary dividends until they are qualified.
How to report your taxable dividend income
After the end of the tax year, December 31, you will be sent a 1099-DIV from your broker or entity that have sent you more than $10 worth of dividends. This form will include what dividends you were paid, regardless of whether they were qualified or ordinary. This information will be needed when filing your tax return.
If your dividend income exceeds $1,500 you may also need to complete a Schedule B.
Capital Gains Taxes
Capital Gains taxes can apply on a variety of investments of capital assets including stocks, bonds, real estate, vehicles and other items. The gain is the profit you receive when you sell these items; any money lost is a capital loss.
If you make a capital loss this can be offset against a capital gain and you will be taxed on the overall gain: capital gains less the capital loss. This is known as your ‘net capital gain’. In the case that your capital losses exceed your capital gains, the difference can be deducted on your tax return. This is capped at $3000 per year, or $1,500 if you are filing jointly.
When you sell your shares of stock in order to make a profit, you may be subject to capital gains tax. There are two types of capital gains taxes. Which tax you pay depends on how long you hold the asset for.
Short Term Capital Gains Taxes are the same as your standard federal tax rates and are defined as the tax on profits generated from the sale of an asset that you have held for less than a year.
Long Term Capital Gains Tax rates are 0%, 15%, or 20%, as mentioned previously with qualified dividend tax rates. This type of Capital Gains Tax is the tax on an asset that you have held in excess of a year.
Therefore, this means that Short Term Capital Gains are subject to a higher rate of tax than Long Term Capital Gains. Hence it is advised to hold on to your Short Term Gains for at least a year tax advantages.
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