Taxes on Stocks | Phil Town

TL;DR

Stocks are taxed through capital gains when sold for a profit and through taxes on dividends received by shareholders. Phil Town explains that holding a stock for more than a year and a day can qualify gains for 0%, 15%, or 20% rates depending on the investor’s tax bracket. He also discusses IRAs, Roth IRAs, and HSAs as tax-advantaged options, so read on for three specific ways to reduce taxes on investments.

Transcript

hi you guys i'm phil towne from real one investing and today i want to talk to you about everything you should know about taxes on stocks nobody loves talking about taxes i know but it's one of the only certainties in life everybody has to pay them and it's that time of year to do so okay so taxes very complicated especially when it comes to taxes ... Read More

Key Insights

• 🚕 Stocks are taxed through capital gains tax on the sale of stocks and taxation on dividends received as a shareholder.
• 😘 Investing for the long term can lead to lower tax rates on capital gains.
• 🚕 Utilizing tax-advantaged retirement accounts, such as IRAs and Roth IRAs, can provide tax benefits for stocks.
• 🥶 Investing through a Health Savings Account (HSA) can offer tax-free earnings if used for qualified health expenses.
• 😘 Stocks held for more than a year and a day can be subject to zero or lower capital gains tax rates.
• 🚕 Ordinary dividends from stocks are taxed as ordinary income based on individual income tax rates.
• 🚕 Contributing to an IRA allows for pre-tax dollars and taxation upon withdrawal, while a Roth IRA uses post-tax dollars and offers tax-free growth.

Questions & Answers

Q: How are stocks taxed?

Stocks can be taxed in two ways: on gains from selling shares and on dividends received as a shareholder. A gain from a sale is subject to capital gains tax, while ordinary dividends are taxed as ordinary income.

Q: How is capital gains tax calculated when selling a stock?

Capital gains tax applies to the profit from the sale, not the entire sale price. For example, buying a stock for $100 and selling it for $150 creates a taxable gain of $50, with the applicable rate depending on the holding period and tax bracket.

Q: How are ordinary stock dividends taxed?

Ordinary dividends are treated as ordinary income and are subject to the investor’s income tax rate. The transcript also says the applicable rate is based on the state where the investor lives.

Q: How are stocks held for one year or less taxed?

Stocks bought and sold within a year are taxed at the investor’s ordinary income tax rate. Phil Town says this rate is typically much higher than the long-term capital gains rate.

Q: What tax rates can apply after holding a stock for more than a year?

If a stock is held for more than a year, a year and a day, the gain from its sale can be taxed at 0%, 15%, or 20%. The applicable rate depends on the investor’s tax bracket.

Q: How does an IRA affect taxes on stock investments?

An IRA accepts pre-tax contributions, and investments inside it can grow tax-free. Taxes are deferred until withdrawals, which Phil Town says are taxed at ordinary rates when taken at age 59 and a half.

Q: How does a Roth IRA affect taxes on stock investments?

A Roth IRA is funded with post-tax dollars. According to Phil Town, investments then grow without additional tax moving forward, regardless of when stocks are bought and sold inside the account.

Q: How can a Health Savings Account reduce taxes on investments?

A Health Savings Account, or HSA, can hold savings and investments whose earnings are tax-free. That treatment applies as long as the money is used for qualified health expenses.

Summary & Key Takeaways

• The video discusses how stocks are taxed in two ways: through capital gains tax on the sale of stocks and taxation on dividends received as a shareholder.

• Investing for the long term and utilizing tax-advantaged retirement accounts, such as IRAs and Roth IRAs, can help minimize taxes on stocks.

• It also explains how investing through a Health Savings Account (HSA) can provide tax-free earnings if used for qualified health expenses.