It may not be such a good idea in the long run to make non-deductible IRA contributions. The taxes may catch up with you.
capital gains tax rates
Taxation of Income, Capital Gains, and Interest
When you receive income, it’s likely going to be subject to taxation. However, the type of income will determine the specific tax treatment, and ultimately determine how much you get to keep. We can break income down into three basic types: ordinary income, capital gains income, and interest income. Here’s a breakdown of each. Ordinary Income – Ordinary income (OI) is income received that is subject to ordinary income tax rates. These tax rates are the rates individuals pay on incremental amounts of income. Rates can be as low as 10% and as high as 37%. Income typically subject to OI rates is income from your wages (W2, self-employment), taxable bond interest, taxable retirement income, and annuity income. Capital Gains Income – Capital gains income occurs from the sale of assets such as stocks, bonds, mutual funds, ETFs, real estate*, and other assets. Depending on how long the assets were […]
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Minimize taxes by adjusting your portfolio
Since the markets have had some downturns lately, now could be a good time to make some adjustments to your portfolio, rebalancing and the like, that may help to minimize taxes. In doing so you can possibly get a bit of advantage in your tax bill from a loss you’ve experienced in your investments. If you have taxable accounts, that is, accounts that are not tax-deferred (like IRAs or 401(k) plans) when you sell your investments there is capital gains treatment on your gains and losses. If you have losses and gains in your taxable account, when you realize these losses and gains by selling the holdings, your losses are subtracted from the gains, and if the result is positive (net gains), these gains are taxed at the preferable long-term capital gains rates. I say this is preferable as the rate is less, often much less, than ordinary income tax […]
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Capital Gains and Losses on Your Tax Return
When you sell things, including stocks, bonds, real estate, collectibles, and other items, you may either gain money or lose money from the original purchase price. This gain or loss is known as a capital gain or capital loss, and (with some exceptions) you will report these capital gains or losses on your income tax return. Often the gains are afforded special tax rates and treatment, and the losses provide additional benefits as well. This entire area of tax reporting can be confusing and there are special rules that you need to follow in order to make sure that you report these transactions correctly and pay the appropriate taxes. The IRS recently published their Tax Tip 2013-28, which details Ten Facts about Capital Gains and Losses. The actual text of the Tip is below: Ten Facts about Capital Gains and Losses The term “capital asset” for tax purposes applies to […]
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Investing in Taxable Accounts vs. IRAs
When investing beyond an employer-sponsored retirement plan, you have a choice to make, between using an IRA, a Roth IRA, or a taxable, non-deferred investment account. In making this choice your primary consideration should be the tax implications. It’s easy to understand the current tax implications: if you invest in a traditional IRA and your contributions are deductible, you are saving the income tax of the deductible contribution. In all other choices, there is no current tax impact. For non-deductible contributions to a traditional IRA, or regular contributions to a Roth IRA, or saving in a taxable account, you are paying income tax as you’ve earned the money, regardless of what you do with it. The second area to consider tax implications on all of these types of accounts is when there is income produced from the investments within each type of account. Income produced includes capital gains from sales […]
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A Few Upcoming Tax Changes to Keep in Mind
As 2013 draws ever nearer, we need to keep a few potential tax changes in mind. These items are subject to change – they’ve changed in the past at the last minute, so there’s no reason to believe they won’t change again – but if they don’t we should be planning ahead. Flex-Spending Health Accounts If your employer provides you with a Flex-Spending Account for healthcare expenses, there will be some changes coming up in 2013. This is the kind of account where you set aside a sum of money each payday, pre-tax, that can be used throughout the year on deductibles, non-covered medical expenses, and co-pays. Beginning in 2013, these plans will be limited to a total of $2,500 per year in salary deferral. This comes about as a part of the Obama-care legislation. Currently there is no cap on contributions to these plans, although some employers place a […]
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Net Unrealized Appreciation Treatment
Image by paddynapper via Flickr When you have a 401(k) plan that contains stock in your company, there is a special provision in the tax law that may be beneficial to you. This special provision is called Net Unrealized Appreciation, or NUA, treatment. It allows you to take advantage of potentially lower tax rates on the growth, or unrealized appreciation, of the stock in your company. When your company stock is withdrawn from the account, you pay ordinary income tax only on the original cost of the stock. Then later when you sell the appreciated stock at a gain, you pay capital gains tax (at a lower rate) on the growth in the value of the stock. The Way It Works The distribution from your 401(k) must be a total Lump Sum Distribution in a single calendar year. This means that your entire 401(k) balance, including not only the stock, […]
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The Importance of a Taxable Investment Account
I’ve written about this topic a few times in the past, such as in this article on tax diversification of your investment accounts. It’s an important topic, but probably the most important subtopic has to do with having a significant portion of your investments not only in tax-deferred accounts, like 401(k) or IRA, but also in regularly-taxed accounts. Roth-type accounts are also critically important, but given the limited availability and costly nature of getting assets into a Roth-type account, I’ll focus for now on the importance of the taxable investment account. With a taxable investment account, you have the opportunity to use the tax code to your advantage, even though it may seem counter to your initial thoughts on the topic. Granted, in a taxable investment account you don’t get the complete tax-deferral that is available from an IRA or the tax-avoidance in a Roth IRA. So with that fact, […]
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