How Will Owning Stocks Affect My Taxes?

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Owning stocks, mutual funds and other investments can affect your taxes, even if you do not sell them. Most people are aware of the taxes related to selling stocks, but may not be aware of other tax implications. If you are not prepared when you file your taxes, you may need to pay additional money when you file your taxes. Mutual funds can be especially tricky if you have the earnings reinvested in the mutual fund automatically.

You are taxed on the money you reinvest, and you will need to adjust your tax withholdings with that in mind.

Paying Taxes on Your Dividends

When it is time to file your taxes, you should receive a 1099-DIV form from each company or fund that sent you dividends. You will need to use the Schedule B form if you are filing your taxes by hand. If you use a computer program or online service, the program will ask you questions and file the form for you if you need to use it. This makes filing your taxes a bit easier. If you file with an accountant, be sure to give him all of your 1099-DIV forms. It helps to have a checklist so that you know which forms you have received and which ones you are waiting to on still so that you do not need to keep contacting your accountant.

Plan to Be Able to Pay 

You can adjust your withholdings as you receive your dividends by using the IRS calculator. Another option is to put aside the money that you will need to pay on taxes from each dividend.

For example, if your current tax rate is approximately twenty-five percent, you will need to set aside a quarter of any dividends that you receive to pay your taxes at the end of the year. This is often the simplest way to do this. You can talk to your accountant if you have more questions about it.

If you are having the money automatically reinvested in the mutual fund, you will need to find the money to set aside yourself. Your financial planner may be able to help you figure out how much you are earning each year, so you can determine the amount you need to set aside for taxes.

Be Prepared to Pay When You Sell

If you do not sell the stocks, you will not need to pay taxes as the values of the stocks go up or down. You only need to pay these taxes when you sell. It is important to realize that this is different from paying on the dividends you receive because you may be responsible for paying both types of taxes during the year. Mutual funds and stocks within a retirement plan are handled differently, and so you do not need to worry about paying the taxes with these types of accounts. Any dividends you receive should go back into the retirement account, and you will either pay the taxes when you make the withdrawals with a traditional account or avoid paying the taxes completely with the Roth account. It is important to keep the retirement accounts separate from other investments since the rules surrounding each type of account are so different. 

Ask an Accountant or Financial Adviser

Each situation can vary depending on the amount of your investments, your current income and other factors that involve your finances.

It is important to consult with your accountant and financial adviser about how much you need to save to cover your taxes each year. If you are just starting to invest, the dividends might not be enough to have a big impact on the amount that you need to pay each year. However, as your investments grow so will your taxes, and you need to be prepared to handle the changes. In most cases, the changes will come gradually, and so you should be able to adjust as your tax burden increases. When you reach a point where you are earning a significant amount in investments each year, it is good idea to hire an acountant who can help you plan the best strategy to save on the amount you pay in taxes each year.