How To Showcase The Brokerage Amount In Your Taxes

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Investing in the volatile stock market is interesting, fun and even profitable. While the market’s volatility may not shock you the taxability of your security transactions may do just that. Not to worry though. There are several important several tax deductions you can take which you may not even know about. So let’s first explain a bit about the taxes you do need to pay, and in doing so, also explain the tax deductions you are eligible to take.

Deductible Investment Expenses

The number one tax deduction overlooked by investors is the cost of the management fees paid to investment brokers. This can be the management of a fund account, advisory services, buy services, etc. You can deduct these fees as an investment expense on Schedule A of the tax return.

Look at 1099 offered by the brokerage company as it will give you the total for the year. However, some 1099s don’t specify the amount and you need to calculate it or contact your brokerage to get a listing of these fees.

Taxpayers who are audited often forget about a stock sale when creating their income tax return. If this happens, the IRS sends out a CP-2000 letter which is about 12-pages long but essentially tells you of the omitted item and calculates the tax liability for the item. However, if you receive this letter, they have not calculated the basis of the stock. This is the formula I listed earlier. In some cases, you may have actually taken a loss on the stock which means there is no tax liability at all. Just call the number and tell them that you will amend the tax return.

Finding all of these tax deductibles can be a bit confusing, and they can even get lost in the process, especially if you are conducting ACH payments.

Deductible Investment Expenses

What is ACH payment?

You probably wonder all the time what is ach payment. The ACH process is where you make electronic payments to your brokerage. In the process of moving the funds from one bank account to the brokerage account, you may forget about the brokerage fees and expenses of buying and selling stocks. These fees can add up over time and they are tax deductible so be careful when declaring your yearly income from stock sales. However, it is wise to outsource such transactions to professionals for efficient results.

When dealing with stock investment gains, it is always best to consult with a reliable accountant. Often, this professional can find tax deductions you did not know existed. In the end, this can be substantial savings that warrant the cost of the accounting services. Check with an accountant before filing your tax return to see what he can do for you.

What About Yearly Dividends?

When it comes to dividends, those that are normal are taxed at a regular rate, but if you have qualified dividends, they are taxed at a rate of 0% to 15%. Qualified dividends need to be paid by a U.S corporation or a qualified foreign corporation and the holding period of the stock needs to be 60 days. Check with your broker or tax advisor to see if the dividends are qualified. Note that dividends on stock that remain in a retirement plan are not considered taxable income.

 Capital Gains

When you sell a stock and make money from doing so, you have profits. If you make profits from stock you have held for a full year and then decide to sell, the amount is taxable. Hold on! This taxable rate is lower because of the time you held the stock. This is known as a taxable rate for long-term capital gains, which is a lower rate than the rate applied to your taxable income. If you are in the 25% or higher tax bracket that is only 15% and 5% if you are in the lower tax bracket.

 Stock Sale Taxes

When you are calculating the profit from a stock sale, you should understand the taxable formula but also the variables in the formula. Certain circumstances can reduce the taxes you pay. Most taxpayers believe they need to pay taxes on the full amount from the sale but that is not true. You should deduct the Basis. This is the formula for that:

Sales Proceeds – Basis = Taxable profit

In other words, you should reduce the commissions paid to the broker. The Basis is the cost of the stock plus the reinvested dividends and commissions. For inherited

Inherited Stocks

If you inherited the stock, the basis is taken from the value on the day of the inheritance (the day of the death).

Sale of Securities

If you sell a stock you are losing money on, this can help offset gains you have from selling other stocks. Some investors sell the stock and then repurchase it a few months later. The IRS will not allow you to claim a capital loss if you repurchase the stock within 30 days. The wash rule is also ineffective if you buy other stock to replace this loss within 30 days of the sale.

Capital Loss

You are only allowed to deduct a certain amount of loss from the sale of stocks. If you sell stocks at a loss you can only deduct up to $3,000 per year. The rest of the loss can be carried forward to future years, however.