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Investment Taxation

While many don't enjoy paying tax, we like to keep in mind having tax consequence usually means you made money.   Financial planning and investment strategies may help defer or minimize tax consequence.  Below are some investment outcomes that may create tax consequence. 

Cost Basis for Investments

Cost basis is the original price or cost of an asset purchased, plus any additional costs like fees.   In general, if you sell an asset for more than your cost  basis, you have a gain.  If you sell for less than your cost basis, you have a loss.  Cost basis may be  adjusted by dividends or capital gains realized.  Cost basis is calculated differently for different types of investments and may become complex.  In general cost-basis is tax-free, while interest, earnings, profits, gains are taxable.

For non-retirement accounts, gains from the sale of securities are generally taxable in the year or the sale, either as short term or long-term, depending on the time period held.

For tax-qualified retirement accounts, taxes are deferred until withdrawn from the account.  

Interest

Interest income may be earned on bank products, like savings accounts and certificates of deposit, as well as money markets and bonds.   

Interest income is taxed as income in the year received.  If you reinvested the interest, is still is considered taxable income.  This however, may increase your cost basis, which is returned tax-free.

Interest from individual securities is reported on Form 1099-INT, while interest paid by funds is reported on Form 1099-DIV.

Dividends

Dividends are payments from stocks, mutual funds or exchange-traded funds (ETF).  

Qualified Dividends, which are dividends from shares in certain domestic corporations and some qualified foreign corporation, where the security is held for a specific holding period.  Qualified Dividends are taxed at at the capital gains rates. 

Ordinary (or non-qualified) dividends are taxed as ordinary income.

Reinvesting dividends does not change the tax consequence.

Dividends are reported on Form 1099-DIV.

Capital Gains

Capital Gains are profits from selling a security for more than what was paid.  This is a "realized gain" and is subject to taxation.

Short-term gains apply to investment you owned for 1 year or less, and is taxed as ordinary income.

Long-term gains apply to securities you owned for more than 1 year and are subject to capital gains taxation.

Capital Gains from individual securities are reported on Form 1099-B, while realized capital gains from funds is reported on Form 1099-DIV.

Covered Tax Lots For Cost Basis

For equities acquired on or after January 1, 2011, or 

For mutual funds, ETFs, and dividend reinvestment plans acquired on or after January 1, 2012, or

For less complex fixed income (bonds) and most options acquired on or after January 1, 2014; or

For more complex bonds and certain related options, but on or after January 1, 2016;

the investment company will report your cost basis to the IRS. 

You are still responsible for reporting your cost basis to the IRS every year on Form 1040, Schedule D, for all shares sold, whether covered or noncovered.  


Retirement Accounts Are Tax-Deferred Until Withdrawn

Please note than interest, dividends, and capital gains relate to retail, non-retirement accounts, like Individual, Joint, Transfer on Death and other registrations.

Tax-qualified retirement plans, like 401(k), IRA, SEP, and others are tax-deferred until withdrawn.  If you did not distribute from these plans during the tax year, usually no tax form is produced.


Holding A Position May Not Avoid Tax Consequence

I didn't sell or trade an investment last year, why do I have tax forms?   Your investment may have earned interest, received a dividend or a fund may have realized a capital gain.   Reinvesting interest, dividends or capital gains does not change the taxation.  However, these profits may increase your cost-basis, which is tax-free when distributed.


Tax Professionals and Strategy

Income tax is unique for each individual's situation.   Investment profits and the subsequent taxation will vary substantially, depending on one's circumstances.  Investment strategies and financial planning that consider your entire situation may help defer or reduce income taxation.

The information presented is intended as high level overview of investment taxation.  Refer to your individual tax professional, attorney, accountant or financial professional regarding specific points of interest to you.


Our Advisors Will Help

Our Advisors Will Help

As part of our Plan Well, Invest Efficiently strategies, our Advisors consider the impact of taxation on your long-term goals.

Our Plan Well planning process helps consider your overall situation and develop efficient strategies to help you reach your goals.



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Important Information

Tax information is provided for informational use only and should not be used for preparation of your tax return.  Income tax is complex.  A qualified tax professional may assist you with determining your overall income tax liability.  Consult your attorney, accountant, or tax advisor for your specific situation.   Tax, legal, or social security claiming services are not offered through or supervised by Lincoln Investment or Capital Analysts.