Investing your money is a great way to ensure that inflation does not erode the value of your savings. However, your gains on investment may still be subjected to several federal and state taxes in Virginia. Therefore, knowing where you are putting your money for tax-effective financial planning becomes crucial.
Nonetheless, you can also seek guidance and assistance from a professional CPA in Herndon, VA, for legally compliant and efficient investment planning.
Different taxes levied on investments
Depending on the nature of your investment and the profit you earn, the following prominent types of taxes may be levied on your returns:
Taxes on capital gains
- The profits you earn by selling an asset are regarded as capital gains.
- Annual capital gains of more than $47,025 are taxable.
- The tax on most assets is 0%, 15%, or 20% per annum.
- The larger your gains, the higher taxes you will have to pay.
Taxes on dividends
- Dividends are taxed in the same year as they’re earned, even if they’re reinvested to buy more shares of an underlying stock.
- Non-qualified dividends are taxed at the same rate as your income tax brackets (10-37%), but qualified dividends attract lower tax rates (0-20%).
- The dividends amounting to $47,026 or less annually are not taxable.
- For dividends of $10 or more, you receive a Form 1099-DIV or Schedule K-1 at the end of the year.
Tax on investments in a 401(k)
- The money put into a 401(k) account, gains on investment, interest, or dividends, are not usually taxed upfront. However, the withdrawals are taxed.
- In contrast, the contributions made to a Roth 401(k) are taxed, but the qualified distributions in retirement are tax-free.
- If you withdraw money from a traditional 401(k) before age 59 1⁄2, you’ll have to pay taxes plus a penalty of 10%.
- A penalty is also applicable if you do not withdraw your money before the age of 72.
Taxes on mutual funds
- Dividends and capital gains earned on your shares are taxed. Moreover, the sale of fund shares attracts capital gains taxes.
- The taxes are calculated based on dividends and the type of income your funds generate each year.
- Capital gains from selling a mutual fund in less than a year are taxed at the ordinary income tax rate.
- The gains from selling funds held for more than a year are taxed at the long-term capital gains tax rate.
Taxes on the sale of a house
- Selling your home for profit may attract capital gains taxes.
- The IRS allows the exclusion of $250,000 for individuals and $500,000 for married couples who file taxes jointly.
- You must meet the IRS criteria to qualify for the exclusion mentioned above.
