Learn the essentials of taxes for investors, including how earnings from different types of investments are taxed and short vs. long-term capital gains.
How are investments taxed?
Earnings from investments are taxed in different ways and at different rates—or sometimes not at all—depending on the investment itself.
Here's a quick overview.
Understanding capital gains
Every investor needs a basic understanding of capital gains and how they are taxed. A capital gain occurs when you sell an investment such as a stock for a profit.
Taxpayers with adjusted income above the applicable threshold are subject to the 3.8% net investment income tax for their long-term capital gains and qualified dividends.
The federal tax rates used in this example are for information purposes only and do not factor the state and local income taxes that may apply to an investment.
How does tax reform affect me?
The Tax Cuts and Jobs Act of 2017 brought many changes to the tax code, which took effect in the 2018 tax year. Let's take a look at some important changes.
The standard deduction
For the 2019 tax year, the standard deduction goes up to $12,200 for single filers (includes married couples filing separately), $18,350 for heads of household, and $24,400 for married couples filing jointly.
The personal exemption
The personal exemption, which was $4,050 in 2017, has been eliminated.
The child tax credit
The child tax credit is expanding with a higher credit ($2,000 per child) and broader eligibility. There is also now a dependent tax credit of $500 for each qualifying non-child dependent.
Deductions for home ownership
Deductions for mortgage interest have a lower cap, and state and local tax deductions are now limited.