For many taxpayers, the biggest financial concerns revolve around two things: how much money they owe in taxes and how to lower their tax bill. When it comes to investment income, there are a few strategies that can help reduce the amount of taxes you owe. In this blog post, we’ll take a look at two of them: tax-free capital gains and dividends.
Capital gains are profits that are realized when you sell an asset for more than you paid for it. For example, let’s say you buy a stock for $10 per share and later sell it for $15 per share. In this case, your capital gain would be $5 per share.
Dividends are payments that companies make to their shareholders out of their earnings. For example, let’s say ABC Corporation earns $100 million in profit this year. The company’s board of directors decides to pay out a dividend of $1 per share to its shareholders. If you own 100 shares of ABC Corporation, you would receive a dividend payment of $100. ($1 x 100 shares = $100.)
Depending on your filing status, your long-term capital gains and dividends tax rate is depicted below. Note that you can make a fairly healthy income and still be within the 0% bracket for long-term gains and dividends.
Note that in the table above, the amounts are your taxable income, so if you itemize deductions and take advantage of other deductions you can reduce your taxable income and be in a better position.
As you can see, there are a few strategies that can help reduce the amount of taxes you owe on your investment income. By taking advantage of tax-free capital gains and dividends, you can keep more of your money in your pocket where it belongs.