Tax Implications for Investing in Stocks

You must pay taxes on money you make in the stock market. However, the rate you pay varies. You should know the tax implications for any stock you buy, so that you can determine if you will make the gain you anticipate after taxes. Whether you are a buy-and-hold investor or a short-term trader, you can find ways to reduce the taxes you pay on your investment income.

Short-term Gains

If you own a stock for a year or less, you pay tax on the gain at the same rate as your ordinary income from your job or business. This rate usually runs higher than taxes on long-term stocks. Determine your income tax rate on your ordinary income and assume you will pay that percentage on any short-term stock gains.

Long-term Gains

Stocks you hold for more than a year qualify for the capital gains tax rate. This rate runs lower than the tax on regular income or short-term stocks, so you can save a lot of money by holding your stocks for more than a year. Some investors use this strategy by holding short-term stocks one day past a year so that they will qualify as long-term stocks.

Short-term Losses

You can deduct up to $3,000 in short-term losses off your regular income as of the 2012 tax year. Note that this does not mean you can take $3,000 of your taxes directly. It means you can lower your taxable income by $3,000.

Long-term Losses

You take long-term losses off of your income up to $3,000, but this figure must be calculated in conjunction with short-term losses. This means that if you did not have a full $3,000 in short-term losses, you can take off long-term losses to bring the total figure to $3,000. For example, if you had $2,000 in short-term losses, you could take off $1,000 in long-term losses for a total deduction of $3,000.

Carryover

You can carryover losses to subsequent tax years. Any loss over $3,000 can be deducted in following years until the full amount has been deducted. Long-term losses that carryover must be carried over as long-term and short-term losses carryover as short-term. You cannot apply short-term losses to long-term gains to reduce your tax burden.

Dividends

If you receive dividends from your stocks, you pay taxes on those stocks as regular income through 2012. However, you will pay an additional 3.8 percent in tax on dividends beginning in 2012.

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About the Author

Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.

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