New Investors Beware Tax Triggers

Just started investing this year?  Learn how to recognize and handle potential tax triggers!

Despite erratic markets, many young professionals started investing for the first time during the pandemic. Many of them did so quite successfully. If you’re a new investor, here are some scenarios and ways to meet an unexpected tax hit from the IRS head on.

  1. You sold shares at a profit and may owe capital gains tax.

You might owe the IRS a portion of the profits from your stock sales. What capital gains tax rate you pay can depend on how much you made, what other income you have, your tax-filing status and how long you owned the investment.

One strategy is tax-loss harvesting, which involves selling poor-performing investments at a loss and using those losses to offset your profits. Or, you might hold shares for at least a year to qualify for more-favorable long-term capital gains tax rates instead of higher short-term capital gains tax rates.

  1. You received dividends and the IRS may want a cut of your dividends.

This rule comes as a surprise to many new investors. Take mutual funds for example – even if you automatically reinvested those dividends and didn’t receive any in cash, you’ve got to pay tax on it. What tax rate you pay depends on the nature of the dividend.

Consider doing your trading inside a retirement account such as an IRA, and you may be able to defer, or in some cases avoid, a dividend tax bill until you make withdrawals in retirement. In general, tax-efficient investments should be made in taxable accounts. Investments that aren’t tax-efficient are better off in tax-deferred or tax-exempt accounts.

  1. You had a good year and made over $200,000 of income triggering the NIIT.

You may owe a 3.8% net investment income tax if your modified adjusted gross income is over $200,000 for single filers or $250,000 for married couples filing jointly. On your investment income, that would be interest, dividends and capital gains.

In this situation, take every tax break you qualify for in this tax year. Itemized deductions could offset your interest, dividends and capital gains.

  1. You need investment-related tax forms and some tax planning guidance.

You may need to file a Schedule B form to report interest and dividends you received, and a Schedule D could be in your future if you had capital gains. You also may need to fill out extra forms for the alternative minimum tax (AMT).

Hire a Financial Advisor who understands tax-efficient transactions and how to build a tax-streamlined portfolio. Investment selection and asset allocation are important factors that affect your returns, but minimizing taxes and fees also has a significant impact on your returns.

Contact Us: Tax efficient investing can minimize your tax burden and maximize your bottom line—whether you want to save for retirement or generate cash. As a young professional advances in their career and their income grows, so does their tax bracket, and tax-efficient investing becomes even more important. Not only do you lose the money you pay in taxes, you also lose the growth that money could have generated if it were still invested. Let us help you set the proper foundation for the future.

A key component of our services is our 360° “whole”-istic approach to your financial health. That means a commitment to providing the right products for your needs, explaining the potential risks and returns, and keeping fees at a minimum. We invest the time to work with you on defining your goals, and discuss the advantages and risks associated with different financial products and services. We want you to make informed decisions. Feel free to contact us directly at 561-209-1120.

TFG Financial Advisors, LLC is a registered investment advisor.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities, and past performance is not indicative of future results.  Investments involve risk and are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.