There are several factors that affect how tax-loss harvesting works in any given situation, including: short and long-term capital gains taxes, your income, and special Internal Revenue Service (IRS) rules.

And if your investments are in a tax-advantaged account like a 401(k) or an individual retirement account (IRA), tax-loss harvesting can’t be used at all.

In this article, we’ll cover:

• How tax-loss harvesting works
• Examples of tax-loss harvesting
• Loss harvesting limits and IRS rules
• Benefits of tax-loss harvesting
• Risks of tax-loss harvesting
• How to claim a loss

How tax-loss harvesting works

If you own taxable investments, tax-loss harvesting could reduce your tax liability by reducing the amount of income subject to capital gains or ordinary income taxes.

Imagine you sold Stock A and Stock B. If you earned $1,000 on Stock A, you have a taxable capital gain. If you sold Stock B at a $400 loss, though, you also have a capital loss. If you subtract the loss from the gain, you’d only owe tax on $600. That’s what’s known as “harvesting” your loss. 

Here’s how the process works:

• Identify eligible securities that have lost value. Tax-loss harvesting can be applied to investments that are subject to taxes, including liquid assets like stocks and funds. For example, if you bought shares of a mutual fund for $100 and they are now worth $50, you’d realize a loss of $50 if you sold.
  
  Tip: Remember that tax-loss harvesting can’t be used on non-taxable investment accounts like 401(k)s and IRAs.
  
• Sell before the end of the year. You can only use losses realized in the current or previous tax years to offset gains realized in a given tax year. Since a loss is not “realized” until the sale is complete, any transactions must be settled by the last day of the year. Thus, investors often harvest losses at the end of the year.
  
  Tip: If you’re calculating the taxes you’ll owe on investments at the end of the year, it’s a good opportunity to get everything else in order to pay your taxes early, which may mean you get your refund sooner.
  
• Claim up to $3,000 of loss on your tax return. If you’re a single filer or married filing jointly, you can usually offset up to $3,000 of capital gains or ordinary income. If you’re married and filing separately, your limit is reduced to $1,500.
  
  Tip: If your losses are more than the limit you can claim, you can typically carry over capital loss to future tax years.
  
• Purchase replacement assets. To avoid disturbing your asset allocation, it’s usually wise to fill the gap in your portfolio with a similar but not identical asset. Why not an identical one? Because if you purchase the same security within 30 days of the sale, you won’t be able to harvest the loss.
  
  Tip: Consider a comparable investment in the same sector. For instance, if you sold shares of stock in a video game company, you might look for stock in another video game maker with similar performance and share price. 

Example of tax-loss harvesting in action

So what is the tax-loss harvesting strategy like in practice? Let’s follow imaginary investor Alex through the process. Alex is single and earns $87,000 per year, paying a marginal tax rate of 24% and a capital gains tax rate of 15% (as of 2021-22).

Disclosure: This example is for illustrative purposes only and is not indicative of the performance of any actual investment or investment strategy.

By selling the investments in Fund B at a loss instead of holding onto them, Alex pays less in capital gains taxes. As long as the amount saved in taxes is more than the amount lost by selling the investments in Fund B, Alex comes out ahead overall for the year. 

IRS rules and tax-loss limits

Wash sale rule (30-day rule)

A wash sale is selling a security at a loss and buying “substantially identical” securities in the 30 days prior or following the sale. Wash sales aren’t illegal, but it is illegal to claim a wash sale as a capital loss. 

Substantially identical stocks are usually shares of the same corporation. Things can be somewhat more complex with funds. For example, if you sold shares of an exchange-traded fund (ETF) that tracks a specific index, you may run afoul of the wash sale rule if you buy shares in a different ETF that tracks the same index or holds most of the same securities. 

Note: The wash sale rule doesn’t reset at the end of the year, even though that’s the deadline for loss harvesting. So if you sold Amazon stock at a loss on December 31 and purchased more Amazon stock on January 3 the following year, it would be a wash sale.

Tax-loss harvesting carryover/carryforward

You can only offset an allotted amount in a given year, regardless of what you may have lost.

Based on the 2021-22 tax year:

• Tax payers that file single can offset $3,000
• Married couples that file jointly can offset $3,000
• Married couples that file separately can each offset $1,500

You can, however, carry additional loss forward to future tax years, using up to the limit each year until the loss is exhausted. The IRS calls this a carryover or a carryforward. You can use the Capital Loss Carryover Worksheet found in IRS Publication 550 to find out how much you can carry forward. 

Benefits of tax-loss harvesting

In practice, the benefits depend on your income, whether you have short-term or long-term capital gains, and your investment strategy. 

Long-term capital gains

When you sell stock you’ve owned for more than a year, you earn what’s known as a long-term capital gain. These gains are subject to the capital gains tax rate, which is generally lower than the marginal tax rate on ordinary income. For single filers earning less than $40,400, the capital gains rate is zero, so there’s no tax to be offset. For single filers earning more than that, the rate ranges from 15-20%.

The potential upsides of tax-loss harvesting depend on your capital gains tax rate. If you are subject to capital gains tax, you’ll want to calculate how much you can reduce your taxes compared to how much money you’ll lose by selling at a loss.

If your capital gains rate is zero, however, tax-loss harvesting will not benefit you at all if you sell investments you’ve held for over a year.

Short-term capital gains

If you hold a stock for less than a year before selling, the IRS considers the profit you earn a short-term capital gain. In that case, you’d pay your regular marginal tax rate of 12% if you earned $40,000 as a single filer, and higher if your income was over $40,000 (as of 2021-22).

Because the marginal tax rate is higher than the capital gains tax rate, the amount by which you can reduce your tax liability with short-term capital losses may be more than with long-term capital losses. But there’s a wide variety of tax brackets and other considerations, so whether you’ll benefit from harvesting short-term capital losses depends on your unique circumstances. 

Your investment strategy

If your focus is on the short term, tax-loss harvesting might be a standard part of your investing strategy. But selling investments that have lost value may not align with a buy-and-hold plan that seeks long-term gains. It’s common for stock values to go up and down over time, and some fluctuate more rapidly than others. In some cases, the immediate tax benefits of tax-loss harvesting may be outweighed by lost opportunities for future gains.

Risks of loss harvesting

Tax-loss harvesting comes with some special risk considerations:

• Complexity and costs. If you purchase securities frequently, it can be difficult to determine your cost basis in a given investment if your brokerage does not offer basis tracking, making it challenging to calculate gains and losses precisely. You may also incur transaction costs when selling shares.
  
• Missed long-term opportunities. Reducing your tax liability is often an attractive prospect, but selling too soon may mean losing out on an investment that later gains significant value. For buy-and-hold investors, it’s important to think carefully before harvesting losses to lower your current income tax. In some cases, it could conflict with your long-term strategy.

How to claim a loss

You claim your capital gains and losses when you file your annual tax return. 

• Most sales and transactions are reported on IRS Form 8949, Sales and Other Dispositions of Capital Assets. That form is also where capital losses and gains are calculated. If you are only carrying over losses from a prior year, you typically will not need to fill out Form 8949.
• You’ll then summarize capital gains and losses on Schedule D (Form 1040), Capital Gains and Losses. IRS Topic 409 and Publication 550 offer detailed instructions. 
• You may wish to speak with a tax professional to ensure you’ve correctly calculated and reported your losses, especially if you’re new to tax-loss harvesting.

If you’re already a Stash customer, you can find all the tax info about your investments, including key dates and documents, in the Stash tax center.

Harvest your losses or hold out for long-term growth?

There’s an investment strategy for every kind of investor. You need to choose the one that’s right for your portfolio, but what? Is tax-loss harvesting a winner for you? Consider the following questions to help you decide:

• How much value have your investments lost compared to when you bought them? Is the amount you’ve lost more or less than the amount you’d save in taxes by selling?
• If you sell, is there a comparable investment that’s not substantially identical you could buy to maintain your portfolio’s asset allocation?
• Are you using a buy-and-hold strategy to build long-term wealth? If so, does reducing your tax liability in the short term alter your projected profits?  

Only you can decide if tax-loss harvesting is right for you, but for many investors, it’s worthwhile to weigh the risks and benefits so you can move forward with confidence. 

Tax-loss harvesting FAQ:

1. Is tax-loss harvesting worth it?

Only you can decide what’s right for your portfolio, but it usually offers the greatest benefits to higher earners who hold their investments in taxable accounts and aren’t strict buy-and-hold investors. 

That said, it’s likely worthwhile for any investor who holds securities in taxable accounts to weigh the benefits of loss harvesting with the potential long-term impacts on their portfolio. 

2. When should you not do tax-loss harvesting?

If you have tax-advantaged retirement accounts like IRAs and 401(k)s, tax-loss harvesting is not applicable. In some cases, your capital gains tax rate may already be zero; in that case, there’s no benefit to loss harvesting.

3. Who benefits from tax-loss harvesting?

Anyone who earns more than $40,400 as a single filer or $80,800 for married filing jointly (as of 2021-22) and has a capital gain could potentially benefit, at least in the short term, from tax-loss harvesting.

4. When should you use tax-loss harvesting?

You might consider using tax-loss harvesting if it will benefit you over both the short and long term. If you’re pursuing a long-term buy-and-hold investment strategy, the short-term benefits could be outweighed by potential long-term costs of selling investments whose value has temporarily fallen but may rise again. 

5. What is the last day for tax-loss selling?

Any loss sales must be settled by the last calendar day of the year to offset gains realized in that year.

6. What accounts should use tax-loss harvesting?

Only taxable investment accounts can use tax-loss harvesting. Tax-advantaged retirement accounts like 401(k)s and IRAs are not taxable. 

7. Can tax-loss harvesting carry over to the next year?

Typically, yes. You can use the Capital Loss Carryover Worksheet found in IRS Publication 550 to find out how much you can carry forward. 

Learn more about taxes on stocks

Dive into the detail you need to understand.

Read the Stash guide

Disclosure: This should not be construed as tax advice. Please consult a tax professional for additional questions.

The post What is tax-loss harvesting? appeared first on Stash Learn.

Note: Stash can’t give you advice about your specific financial situation, and this article is for general education only. For personalized advice and any additional questions, consider working with a tax professional.

How do taxes on stocks work?

As a general rule, the money you earn from stocks and other investments is taxable. The tax rate on stock gains depends on the type of earnings, such as:

• Profit from selling shares of stock
• Dividends you receive
• Interest you earn on money in brokerage accounts

There is an exception: Earnings in tax-advantaged accounts for retirement may be tax-deferred or tax-exempt. For example, 401(k), 403(b), and traditional IRA earnings are generally not taxable until you make withdrawals. And if you have a Roth IRA, earnings and qualified withdrawals are typically tax-exempt. However, if you make non-qualified withdrawals, like taking money out before age 59½, you’ll generally pay taxes plus a penalty.

Capital gains tax

Most of the money you earn from your stock investments is considered capital gains. The tax rate on stock gains may be lower than the rate on your regular income, so understanding the intricacies can pay off.

What’s a capital gain?

Capital gains are profits from selling investments. Here’s an imaginary example:

• You purchase 10 shares of stock for $10 each: a total investment of $100. 

($10 x 10 = $100)

• Five years later, the stock price is $15; now your investment is worth $150. 

($15 x 10 = $150)

• You sell the stock, making $50: $150 minus your $100 initial investment.

($150 – $100 = $50)

• The $50 profit is “realized” when you sell the stock; that’s the capital gain. There’s no capital gain until you sell the stock, no matter how much the price rises.

What’s a capital loss?

If you sell an investment for less than what you paid for it, that’s called a capital loss. It’s calculated just like a capital gain: Subtract your initial investment from the total sale price. In some cases, you can carry over capital losses from prior years.

What are short-term and long-term capital gains?

If you hold a stock for less than a year before selling, the IRS considers the profit you earn a short-term capital gain. But if you hold it for more than a year, the earnings are long-term capital gains. You’ll need to understand both, because capital gains tax rates are generally different for each.

Short-term capital gains tax

Short-term capital gains are taxed as ordinary income, just like the income you earn from your job. As of 2022, those rates ranged from 10% to 37%, depending on your tax bracket.

Long-term capital gains tax

Long-term capital gains are usually taxed at a special capital gains tax rate: 0%, 15%, or 20%, based on your income. In rare cases, the rate goes as high as 28%. But for many people, it’s less than their normal income tax rate.

What’s a net capital gain?

According to the IRS, “the term ‘net capital gain’ means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss for the year.” So if you have long-term capital gains but short-term capital losses, subtract the losses from the gains to arrive at your net capital gain. This is the amount of money on which you’ll owe taxes.

Dividend taxes

Dividend income is typically taxable; the rate depends on what type of dividends you earn:

• Ordinary dividends are taxed at your ordinary income tax rate.
• Qualified dividends are taxed as capital gains. 

Whether your dividends are ordinary or qualified largely depends on whether you have met the holding period, which means you held the stock for 60 to 90 days during a given window of time. Your 1099-DIV tax form will tell you which category your dividends fall into.

Taxes on stock options

You might receive stock options as part of your job’s compensation package; this is most common in startups and tech companies. A stock option gives you the right to buy a stock at a particular price, called the grant price, regardless of the stock’s market price at the time you buy it. When you decide to buy stocks at the grant price, it’s called exercising your stock option. Ideally, the price of the stock is higher than the grant price when you exercise your option, so you get a bargain. 

Here’s a hypothetical example of how it might work:

• Your company gives you stock options with a grant price of $20 per share, and you’re allowed to buy 100 shares at that price.
• When you exercise your stock options, the stock is valued at $30 per share, and you buy 100 shares.
• You spend $2,000 ($20 x 100), and the shares you now own are worth $3,000 ($30 x 100).
• You can now hold onto those shares or sell them.

Taxes on statutory vs. nonstatutory stock options

Stock options are considered either statutory or nonstatutory, and taxes work differently for each type.

• Statutory stock options: You usually don’t incur any taxes when you exercise your options, though you may be subject to alternative minimum tax when you file your tax return. When you sell the stocks, any income you make will generally be subject to taxes. The rate at which your profit is taxed depends on a few factors, including whether your options are qualified or non-qualified and how long you have held the stock. Your capital gains will be classified as short- or long-term based on how long you’ve held the stock.

• Nontatutory stock options: If the common price of the stock is higher than the grant price when you exercise your option, like in the example above, the difference between what you paid and what the shares are worth is usually considered taxable by the IRS. You’ll also be subject to short- or long-term capital gains taxes when you sell your stocks.

When do you pay taxes on stocks?

Taxes on investment income are usually due on the same schedule as other taxes. For most people, that’s when you file your annual tax return, but some people pay quarterly estimated tax or use another fiscal calendar. 
One exception is if you hold stock in a tax-advantaged account, like a 401(k), 403(b), or IRA. In that case, you probably won’t owe taxes unless you’ve made a qualified withdrawal; if you have a Roth IRA, qualified withdrawals aren’t usually taxed at all. Non-qualified withdrawals, however, may trigger tax liability plus a penalty.

How to pay lower taxes on stocks

Here are five strategies that might make an impact on your tax bill:

• Buy and hold. Holding onto your investments for a year or more may help you secure the lower long-term capital gains tax rate for dividends and money you make selling stock.
  
• Open a traditional or Roth IRA. These accounts offer multiple tax advantages that might add up to significant tax savings over the long term.
  
• Contribute to your 401(k) or 403(b) plan. With pre-tax contributions and deferred taxes on earnings, your contributions could reduce your taxes today and tomorrow.
  
• Hold dividend-paying stocks in tax-advantaged accounts. Any tax-advantaged retirement account might reduce your tax liability. For instance, dividends earned on stocks in a 401(k) or individual retirement account aren’t taxed until you make qualified withdrawals. And in most cases, dividends earned in a Roth IRA are not taxable, provided you follow withdrawal rules.

• Use short-term capital losses to offset long-term capital gains. By investing strategically, you may be able to balance out losses and gains to reduce the amount of taxable income you receive from selling stocks.

Tax updates for 2022

The IRS implemented some tax changes for 2022; here are a few highlights you may wish to be aware of:

• Income tax brackets were adjusted, so you may be in a lower tax bracket than last year if your income hasn’t changed.
  
• Long-term capital gains tax brackets have also been adjusted upwards.

• Contribution limits for IRAs and 401(k)s have increased.

Understand the tax implications when you invest

If you earn money through your investments, it will likely affect your taxes. There are a number of strategies you can employ to possibly reduce the taxes on stocks. You may wish to work with a tax professional to understand how various approaches work for your personal circumstances. And Stash’s Tax Resource Center can help you stay on top of important tax dates and forms.

Stock taxes FAQ

Can you claim losses on taxes?

Sometimes. There are limits on how much “excess loss” you can deduct through tax-loss harvesting, and capital gains could offset capital losses. You may be able to carry excess loss forward to future tax years.

How do you avoid capital gains tax on stocks?

Trading stock within tax-advantaged accounts for retirement, like IRAs and 401(k)s, typically does not trigger the capital gains tax, although qualified withdrawals are taxable. 

If I reinvest my dividends in a DRIP program, do I have to pay taxes?

Participating in a Dividend Reinvestment Programs (DRIP) doesn’t directly affect your tax liability. But DRIP programs usually boost the power of compounding, which gives you the potential for greater returns over the long term.

Do I have to pay taxes if I don’t sell my stocks?

Generally, no. Except in special circumstances, you only pay taxes on money you earn when you sell your stocks. If you hold onto stocks that increase in value, there are no tax implications.

The post Taxes on Stocks: Guide to Paying Less in 2022 appeared first on Stash Learn.

The IRS partners with the nonprofit organization Free File Alliance, a group of eight software companies that offer tax filing services. The IRS and the Free File Alliance have given roughly 100 million taxpayers free access to tax preparation software through the Free File Program since 2003.  Taxpayers who qualify for the program can access software from up to 8 tax-preparation companies including TaxAct and 1040Now.

How does the program work?

As a general rule, you may be able to qualify for the free tax filing services if your individual or joint adjusted gross income with a spouse is $73,000 or less. 

But each tax prep service lists its own qualifications which can include restrictions around income, age, military status, and more. Here are a few examples: 

• FileYourTaxes.com offers free filing for people who earn between $9,500 and $73,000, and are 65 years or younger. People living in certain states can file state taxes for free. 
• TaxAct provides a free service for people 56 years old and younger, who earn $65,000 or less annually. Some state filings are also free.
• With Free1040TaxReturn.com, people who are any age and earn $73,000 can file for free, except if they live in certain states. 

The IRS provides a lookup tool to help taxpayers find the free service that works best for them. 

About 57 million American taxpayers have used this program since it started in 2003, according to the Free File Alliance. The program has reportedly saved taxpayers $1.7 billion in tax preparation fees, according to the IRS. 

Some but not all of the services allow you to file your state tax return for free, depending on the state.

When can I file my taxes?

Your employer should send any W-2 or 1099 forms you need to file your taxes by January 31, 2022. The IRS started accepting federal tax returns on January 24, 2022. 

Taxes are due on April 18, 2022. So make sure to file your tax return before that date.

The post Do You Know About the IRS’ Free File Program? appeared first on Stash Learn.

But the money you earn on your investments in a personal brokerage account can be subject to taxes once you sell your holdings, or close your account. That’s why it’s important to understand the tax consequences of selling your investments. Read on to find out more.

Understanding brokerage account selling

Any time you invest in the stock market, your investment has the potential to increase in value. For example, a stock you may purchase for $20 at some point could be worth $60 later on. That increase in value, or profit, once realized is called a capital gain. That profit is “realized” when you sell it. And that profit can be subject to different types of taxes, based on how long you’ve held the stock you plan to sell. 

(If you lose money, which is always a risk when investing, it’s called a capital loss. Generally speaking, you won’t owe taxes on a security that has decreased in value from the time you bought it.)

Short-term capital gains vs. Long-term capital gains

There are both short-term and long-term capital gains, and each one is taxed differently:

• Short-term capital gains are for investments held one year or less. 
• Long-term capital gains are for those held for more than one year.  

Short-term capital gains are essentially taxed at the same rate as your ordinary income for federal income tax purposes, and that rate can be nearly twice as high as the rate for long-term capital gains. The top ordinary income rate, for example, is currently 37%. The top long-term capital gain rate is 20%. 

• Good to know: There are seven ordinary income tax brackets ranging from 10% to 37%.   
• There are only three long-term capital gain brackets: 0%, 15%, and 20%.

In other words, it can pay to hold your investments for longer periods of time, as you may pay less in taxes. 

Paying taxes on dividends

A dividend is a portion of a company’s earnings, paid out to shareholders of some investments.¹ Some people reinvest their dividends automatically with a dividend reinvestment plan or DRIP, which you can set up with your Stash account if you have one. Whether you reinvest your dividends or not, you’ll likely have to pay taxes on dividend earnings. 

The rate at which the dividends are taxed depends on whether they are ordinary (nonqualified) or qualified dividends. An ordinary dividend is taxed at the same rate as your income is taxed. So if your income is taxed at 24%, dividends you earn are also taxed at that rate. 

By contrast, you may pay the lower long-term capital gain rate on a qualified dividend. Generally speaking, a qualified dividend must meet certain criteria in order to be characterized as such. It must be issued by a U.S. company or qualifying foreign company. It is also for a stock that you’ve held for a period of 60 out of 121 days, usually within a specified window of time counted from something called the ex-dividend date. (You can find out more about qualified dividends and ex-dividend dates here.)

Follow the Stash Way

Stash encourages you to follow the Stash Way, our investing philosophy which includes investing regularly, and investing for the long run.

The post What Happens When You Sell Investments From a Brokerage Account? appeared first on Stash Learn.

Namely, gains—also called earnings—in traditional retirement accounts grow tax-deferred as long as you don’t make any withdrawals from the accounts prior to age 59 1/2.² Important note: All investing involves risk, and you can lose money with your investments. Gains are not guaranteed. 

What happens if you sell from a retirement account?

But if you sell some of your investments and withdraw the money prior to reaching the age 59 ½, the money you take out will be subject to regular income taxes, plus an additional 10% early-withdrawal penalty. Similarly, if you decide to close the account and sell all of your investments, you may have to pay the same penalty in addition to income taxes on the entire amount.

What about Roths?

There are some exceptions to this rule. Roth accounts are funded with post-tax dollars. You can withdraw contributions you’ve made at any time, without taxes or penalties before retirement age. You may, however, have to pay taxes and penalties if you withdraw any of your earnings prior to a five-year holding period.³ 

Good to know: The Internal Revenue Service (IRS) may waive the 10% penalty for early withdrawals from retirement accounts if you become permanently disabled, or to pay for medical expenses that exceed 7.5% of your income. Find out more from the IRS here and here.

Follow the Stash Way

Stash encourages you to follow the Stash Way, our investing philosophy which includes investing regularly, and investing for the long run. Planning for retirement is also a critical part of your financial plan. If you must close your brokerage account, consider something called a rollover, which means you transfer your retirement account from one financial institution to another. There aren’t likely to be any tax penalties or consequences for that. 

You can learn more about 401(k)s and IRAs here.

The post What Happens When You Sell From a Retirement Account? appeared first on Stash Learn.

That’s according to a May 2021 survey¹ from Stash on the changes to the child tax credit. Starting July 15, 2021, the Internal Revenue Service (IRS) will raise the yearly tax credit for children below six-years-old to $3,600 and for children between six and 17 to $3,000 from its current $2,000 per child. 

This money is part of the $1.9 trillion stimulus package, called the American Rescue Plan, signed into law in March, 2021. It is an expansion of the existing child tax credit of $2,000 per child. The child tax credit began in the 1990s as a $400 per child credit for children living in poverty.

The changes to the tax credit come as inflation has driven costs for families to their highest level since 2008. Prices have increased for everyday items including food, clothing, shelter, fuel, transportation, doctors’ and dentists’ services, drugs, and other goods and services. 

The revamped tax credit will reportedly benefit 88% of American families with children. Individuals who earn an adjusted gross income (AGI) of $75,000 or less, married couples who earn $150,000 or less, and heads of household who earn $112,500 or less will be eligible to receive the credit. Additionally, those who qualify can receive half of the benefits as monthly payments, and the other half after filing their tax returns for 2021. Those monthly payments reportedly will be $250 per child between six and 17, and $300 per child under 6. Taxpayers can still opt to receive the full amount after filing. 

Ahead of these tax credit changes, Stash asked Americans how they feel about the enhancements, and what they plan to do with the money: 

Stash’s survey findings

One third of those surveyed said their childcare costs increased during the pandemic, but millennial and Gen Z parents were more than twice as likely as older generations to say these expenses increased over the past year. Fifty-two percent of millennials and 47% of Gen Z parents said their costs went up during Covid-19. Meanwhile, 28% of Gen X parents and 17% of Baby Boomer parents reported paying more for childcare during the pandemic.

On average, U.S. families spend $8,355 per year per child on child care alone, according to a Bankrate survey. 

Stash’s survey found that more than half of the parents who are eligible for the child tax credit plan to save the money, regardless of how many kids they have. A further 20% said they plan to use the money to pay off debts. About one-third of those surveyed say they will spend the credit on items for their children, such as school supplies and other retail items (An equal percentage of men and women said they were likely to spend the money on these things.) But, women are twice as likely as men to use the money for weekly necessities, such as groceries. Women are also ten percentage points more likely to use the money to pay bills. 

One-fourth of those receiving the credit said they would put the money in an investment account. However, the survey also found that men were more likely to invest the extra money, with 46% of men saying they would put the money in a personal investment account compared to 11% of women. Women are more likely to choose a standard savings account, with 57% of women choosing this option. 

While women might be less inclined to invest than men are, they tend to maintain a more level head than men during periods of market volatility, when they do invest. Stash recommends starting to invest early and doing so on a regular basis over a long period of time. 

Saving and investing with Stash

If you set up Direct Deposit with your 2020 tax return, you’ll receive your child tax credit via Direct Deposit. Your Stash account can help you spend or save the money for your kids. You can set up Goals in your Stash account, such as spending on child care or paying for groceries or school supplies.² 

You can also set up a custodial account for your children with Stash.³ A custodial account is essentially a brokerage account for children to access when they reach the age of majority, which differs from state to state, with some investing and tax benefits. Custodial accounts have been around for decades. They’re also known as Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts. Generally speaking, different states typically allow one versus another. UTMAs allow for investments in more types of assets, including real estate. UGMAs confine themselves to more traditional securities.

With Stash+⁴, you can open two custodial accounts.

The post Spend or Save? How American Consumers Plan to Use the Child Tax Credit appeared first on Stash Learn.

Starting July 15, 2021, the Internal Revenue Service (IRS) will increase the child tax credit for children under the age of six to $3,600, and for children between six and 17 to $3,000 from its current $2,000 per child. 

This money is part of the $1.9 trillion stimulus package, called the American Rescue Plan, signed into law in March, 2021. It is an expansion of the existing child tax credit of $2,000 per child. The child tax credit began in the 1990s as a $400 per child credit for lower income families.

These payments for children follow the three rounds of direct payments sent out as a result of various pandemic-related stimulus packages. The tax credit increase is currently only for the 2021 tax year, but President Biden and other lawmakers are reportedly exploring making the changes more permanent.

The changes to the tax credit come as inflation has driven costs for families to their highest level since 2008. Prices have increased for everyday items including food, clothing, shelter, fuel, transportation, doctors’ and dentists’ services, drugs, and other goods and services.

Meanwhile, the Covid-19 pandemic has rattled the U.S. economy, hurting the lowest earners the most. The economy lost more than 8 million jobs in the spring of 2020, with the lowest quarter of wage earners shouldering 80% of the total job losses for 2020. The leisure and hospitality sector saw the biggest dip, followed by government, education, and health services. And in those industries, lowest average wage and lowest average hour occupations are suffering the most even a year later. 

How the tax credit works

The revamped tax credit will reportedly benefit 88% of American families with children. Individuals who earn an adjusted gross income (AGI) of $75,000 or less, married couples who earn $150,000 or less, and heads of household who earn $112,500 or less will be eligible to receive the credit. 

The credit begins to phase out for individuals and married couples who earn more and completely cuts off for individuals who make $95,000 or more annually and married couples who make $170,000 or more. The credit ends completely for individuals who earn approximately $200,000 or more, and married couples who earn $400,000 or more.

Additionally, those who qualify can receive half of the benefits as monthly payments, and the other half after filing their tax returns for 2021. Those monthly payments reportedly will be $250 per child between six and 17, and $300 per child under 6. Taxpayers can still opt to receive the full amount after filing. Dependents who are 18 years old or 19 to 24 years and in school full time for at least five months per year are eligible to receive a $500 annual nonrefundable tax credit.

How to claim your credit

Families who qualify for the tax credit and who filed taxes for 2019 or 2020 will automatically be enrolled to receive the direct monthly payments starting in July. The IRS sent letters to more than 36 million families alerting them of their eligibility for the payments. If you earned less money in 2020 than you did in 2019, and you have yet to file your taxes because of an extension, you may want to consider filing soon to receive the monthly payments. 

If you don’t typically file taxes because you earn little or no income, you can use a tool from the Treasury Department and the IRS known as the Non-filer Sign-up tool. People who are underserved, experiencing homelessness, or who don’t file for another reason can use this tool to register for the monthly payments if they are eligible.  

Families can opt out of monthly payments and instead receive the money in one lump sum as a tax refund when they file at the end of the tax year. In that case, parents must unenroll for the monthly payments using the Child Tax Credit Update Portal.

Using your child tax credit

You probably have a good idea of how you plan to use your child tax credit, whether it be on school supplies or groceries for your kids, or whether you want to save or invest the money for your kids’ future. 

If you set up Direct Deposit with your 2020 tax return, you’ll receive your child tax credit via Direct Deposit. Your Stash account can help you spend or save the money for your kids. You can set up Goals in your Stash account, such as spending on child care or paying for groceries or school supplies.² 

You can also set up a custodial account for your children with Stash.³ A custodial account is essentially a brokerage account for children to access when they reach the age of majority, which differs from state to state, with some investing and tax benefits. Custodial accounts have been around for decades. They’re also known as Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts. Generally speaking, different states typically allow one versus another. UTMAs allow for investments in more types of assets, including real estate. UGMAs confine themselves to more traditional securities.

With Stash+⁴, you can open two custodial accounts.

The post How a Bigger Child Tax Credit Could Mean More Money for You appeared first on Stash Learn.

While that date gives the IRS much-needed time to accommodate new stimulus payments and a backlog of tax returns, it also gives procrastinators more time to delay filing. With that in mind, we’ve researched the top reasons why people delay doing their taxes, and offer some tactics to help motivate you to get the job done.¹

1-Your taxes are complicated

The Covid-19 pandemic has made many people’s financial situations more complex. You may have seen your income or circumstances change, which can make filing all the more daunting. Maybe you moved home and earned income in a few different states this year. Or maybe you lost your job and ended up taking on several freelance gigs. Or maybe you received unemployment in 2020, which has specific filing exemptions this year.  

Solution: Being informed is probably one of the best ways to prepare when you have a complicated tax situation. Try getting caught up on rules or regulations that might apply to you and your taxes so that you’re filing correctly. You can get more information from Stash’s guide to tax season, or on the Internal Revenue Service’s (IRS) website.

You can hire a tax professional for a fee through services such as H&R Block, Turbo Tax, or QuickBooks. Depending on your tax situation, you may be able to work with a professional for free or for a reduced fee. Having a professional review your information before you file can give you peace of mind.

Keep in mind that some people qualify to file their taxes with a service for free. The IRS offers a Free File program for roughly 70% of Americans. Taxpayers who earn an Adjusted Gross Income (AGI) of $72,000 or less can file their federal taxes, and in some cases their state taxes, for free with tax preparation software. 

If you’re not comfortable handling your taxes by yourself, you might want to consider hiring a tax professional. “A small fee upfront is worth it to avoid all the stress and fear (and possible penalties fees). You can trust that a trained professional knows all the ins and outs of the tax code this year, so you can just write your check and relax,” says Josh Zimmelman, managing partner of Westwood Tax & Consulting, based in Rockville Centre, New York. 

2-You’re afraid you might owe money 

Some people don’t pay all or some of their taxes throughout the year and then have to pay them once it’s time to file. There are a few reasons you might owe money: 

• If you have a full-time job, you filled out a W-4 indicating how much of your paycheck should be withheld for tax purposes. But if less money was withheld from your income than you actually owe, you could end up owing once you file.
• Freelancers owe taxes on a quarterly basis. They have to pay estimated taxes each quarter, as well as a self-employment tax. If a freelancer doesn’t pay enough, they could end up owing once it’s time to file for the year. 
• This one likely only applies to a handful of people. But if you won something in the past year, such as the lottery or a new car, you’ll likely owe taxes on that prize when you file.

Solution: If you think you won’t be able to afford your tax payments, the IRS recommends that you file before the deadline, and pay as much of the penalty as you can. Failing to make your tax payments on time can lead to additional fees and interest, so making an initial payment can help prevent that. You may consider pulling from your rainy day fund or emergency fund to cover as much of the debt as you can.

You can also call the IRS to inquire about a payment plan. The IRS may be able to give you an extension, and a schedule for repayments. For no fee, you can set up a 120-day payment plan, but you’ll still have to pay interest and other penalty fees until you pay off your debt. Or you can establish a six-year plan, which costs $31 to set up in addition to interest and penalties.

A longer-term course of action for people who think they’ll owe taxes at the end of the year is to stick to a budget throughout the year that includes setting aside money for tax payments. “This involves controlling one’s spending, which many people fail to do, and they end up spending their earnings,” says Bryce Welker, a Certified Professional Accountant based in San Diego, California. 

One budget you might use is the 50-30-20 one, which segments your income into three categories: 50% for essential, fixed expenses, 30% for nonessential, variable expenses, and 20% for savings and investing. Make sure to figure your quarterly estimated taxes into your budget. You may want to allocate more than 20% of your income to savings so that you have backup funds to fall on if you owe money on your annual taxes. 

3-Taxes are boring

You don’t often hear friends or coworkers saying they’re excited to do their taxes. It’s a task which a lot of people find tedious. And people are more likely to procrastinate on work they find boring, difficult, or not intrinsically rewarding, according to Harvard Business Review. Doing your taxes can be both boring and difficult, and doesn’t always result in a refund.

Solution: One strategy is following an earlier deadline than May 17. “Create your own self-imposed deadline earlier in the season and enlist a friend to dole out some real life consequences should you fail to meet it or reward yourself if you do meet it,” Zimmelan recommends. For example, try to get your taxes done by the end of April, and reward yourself by ordering takeout or watching your favorite movie once you’re done. 

Getting your taxes done early can alleviate any stress that you might have about filing. If you find you’re having issues with your taxes or you’re confused about your taxes, it’s better to give yourself time to consult with a professional if needed. The sooner you file your taxes, the sooner you’re likely to receive your refund, if you’re eligible for one.

For more information on tax season, including the materials you’ll need, important dates, and more, refer to our tax guide.

The post 3 Things People Dread Most About Taxes appeared first on Stash Learn.

That may mean you have a main source of income where taxes are deducted by an employer, and you also work on the side, producing income from a freelance gig such as driving a car, walking dogs, writing a blog, or doing handiwork. 

And while that extra income can help you make ends meet, and pay your bills, and hopefully increase your savings and investments, that money unfortunately doesn’t come free. You’re likely to owe federal income tax on it, and just about any money you make. And since you’re most likely earning your side income as a freelancer, or self-employed contractor the chances are no one is taking money out for taxes. That means it’s on you to put money aside and send your payments to you have to the Internal Revenue Service (IRS). 

Here’s a quick explainer of what to expect from taxes if you work in the gig economy.

1-1099-MISC. Each entity you work for as a freelancer should send you a form 1099-MISC by January 31, if you earned $600 or more.

2-Schedule C. You’ll need to file your side-gig income on a Schedule C form, filed annually with your 1040. The form is essentially a statement  of income or loss from a business that you operate independently. You’ll be filing as a sole proprietor.

3-Estimated taxes. Generally speaking, if you owe more than $1,000 in federal income tax from side-gig income, after all of your withholdings and deductions have been accounted for, you’ll also have to file estimated taxes on a quarterly basis, according to the IRS. (If your withholding for other income during the year will cover at least 90% of your total taxes for the current year, or you paid 100% of the prior year’s taxes, however, you may not have to pay estimated taxes.) 

So what are estimated taxes? As their name implies, estimated taxes are an estimate of what you’ll pay in income taxes for the year each quarter.

In addition to income tax, estimated taxes also include self-employment tax. As a general rule, no one is taking money out of your gig income for Social Security, Medicare and disability. It’s up to you to do that. This is generally about 15% of your income from your gigs. 

• You can make an educated guess of what your estimated taxes will be, based on what you expect your total income and tax rate to look like–i.e. Your income from a full-time job, plus any freelance income–and then dividing that amount of taxes by four.  Similarly, if you worked a side-gig last year, you can use the prior year’s income as starting point. 
• The IRS also provides something called the 1040-ES worksheet to help you determine the correct amount of quarterly taxes. 
• There are also estimated tax calculators that can help you figure it all out. 

Good to know: Aim to put aside at least 30% of your income from side gigs to pay Uncle Sam, as a general rule of thumb.

4-Penalties. You can take the easy route and continue to file all at once, at the end of the tax year. But bear in mind, that If you owe quarterly taxes and don’t pay them, you’ll likely owe an underpayment penalty at the end of the year.

5-What are the estimated tax payment dates?*

• 1st payment—April 15, 2021          
• 2nd payment—June 15, 2021           
• 3rd payment—September 15, 2021  
• 4th payment—January 18, 2022**  

You can find vouchers for your quarterly payments here, as well as options for electronic payments. 

*Source: IRS

**You don’t have to make the payment due January 18, 2022 if you file your 2021 tax return by January 31, 2022 and pay the entire balance due with your return.

The post Yes, You Have to Pay Taxes on Your Side Gig appeared first on Stash Learn.

Remote work during Covid-19 has allowed many Americans to move away from the places where they previously lived and worked, even if only temporarily.

Relocating to less expensive locations or to be with loved ones has been one way to save on housing costs and other bills in a year where millions of Americans have lost their employment, or been furloughed. But if you moved out of the state in which you worked during the previous year, keep in mind that you may owe taxes in both of those states, unless they have something called a reciprocity agreement. 

As you prepare to file your 2020 taxes, here’s what you should know.

Know the rules in your state

Even if you consider one state your primary residence, once you’ve lived in another state for 183 days or more, many states consider you a resident for tax purposes there. In that case you’re likely to have to pay taxes to that state for the amount of time you worked there, as well as to the state you left. Note that every state has its own regulations, so you should consult with a tax professional on your specific situation.

Taxpayers who do owe taxes in multiple states should likely “file a part year return for each state that indicates the dates that they were in each state, and the income earned in those states,” says Christopher Jervis, an Enrollment Agent (EA) from Lone Wolf Financial in Winder, Georgia. 

You should check individual state tax laws, since some might consider you a full-time resident if you’ve been there 183 days or more, says Jervis. “Full-year residents are often taxed on all income, regardless of the state in which it was earned,” Jervis says. However, you might be able to claim a credit or allowance in your state of full-time residence.

Some states might have reciprocity agreements, meaning that you can live in one state and work in another without incurring double taxation. For example, Pennsylvania has reciprocity agreements with Indiana, Maryland, New Jersey, Ohio, Virginia, and West Virginia. So you could live in Pennsylvania and work in Maryland without being taxed twice. 

Every state has specific tax laws so you should familiarize yourself with those laws if you’ve moved between states this year. Many, like Florida, have no individual state income tax laws. In fact, six other states—Alaska, Nevada, South Dakota, Texas, Washington, and Wyoming—don’t deduct a state income tax. In New Hampshire and Tennessee, residents don’t pay state taxes on earned income but they do pay taxes on investment income. So if you’ve moved to or from one of these states, you may want to keep that in mind when you file.

Find out which deductions you can take

Itemizing deductions when you’re filing your taxes can be one way to reduce your taxable income. You should familiarize yourself with updated regulations on what may be deductible for you, as allowances do change. For instance, while taxpayers were once able to itemize moving expenses, most no longer can because of the 2017 Tax Cut and Jobs Act. “In order to deduct moving expenses on your federal tax return, you must be an active member of the US armed forces (or a spouse or dependent) moving related to a permanent change of station,” says Josh Zimmelman, the managing partner of Westwood Tax & Consulting in Rockville Centre, New York. 

Talk to your human resources department

As of July 2020, 22% of American adults said that they moved or know someone who moved as a result of the pandemic, according to a Pew Research Group survey. If you’ve moved, you may want to speak with whoever is in charge of payroll at your organization, if you haven’t already done so. You can update them on your new address so that the correct deductions are being made to your paycheck, and they can provide you with the right W-2 tax forms for filing.

Doing this can “avoid confusion and can even be used for a tax saving advantage,” depending on where you moved, says Sam Otto, a Certified Professional Accountant (CPA) from Uncle Sam’s Accounting in Helenville, Wisconsin. Otto cites Florida as an example since the state has no state income tax. In that case, moving to Florida and changing your residence might save you money in taxes.

File as soon as possible

Whether you moved in 2020 or not, you should aim to file your taxes as soon as you can. Employers are required to provide their workers with W-2s and other tax forms needed to file by February 1, 2021. Once you have that and any other relevant paperwork, you should be able to file. 

“One thing that every taxpayer should expect, whether they moved or not, is a longer than normal turnaround to receive refunds. We expect tax processing to be very slow this year, with refunds possibly delayed due to the nearly nine-month backlog that the IRS is still working on for 2020,” says Jervis. So filing your taxes in a timely manner could help you see a return more quickly if you receive one. 

With your Stash account, you can set up Direct Deposit and have your tax refund deposited directly into your account. You might save that refund in a partition for a certain goal, such as buying a house, or use it when you invest.

The post Why Your Taxes Might Change if You Worked in Another State in 2020 appeared first on Stash Learn.

Vacations, celebrations, nights out on the town, seeing the latest blockbuster in a theater with overpriced popcorn. All are postponed thanks to Covid-19. Now, many Americans are planning to add more one luxury to the deferred list— splurging with their tax refunds.¹

American taxpayers are facing tough financial decisions nearly one year into the Covid-19 global pandemic that has plunged the U.S. into a recession and stripped more than 22 million jobs (and counting) from the workforce. That means cruises, home renovations, new cars, even the ability to pay down debt are all going to have to wait. But Covid-19 has not deferred entrepreneurial spirit or the uniquely American ability to find the silver lining. We spoke to 5 taxpayers who have big plans for their tax refunds.

Manny Vetti

President of a tax management company

West Palm Beach, Florida

Refund strategy: Invest the money and grow it for a future adventure

“I originally thought of taking a trip to Alaska to go fishing with it,” Vetti says of the estimated $3,000 he is expecting to get back this year. “But it must be a sign from the universe since Covid put a major stop on things. It’s okay. That was just my sign that I need to invest that money.”

Vetti says his change of plans made him remember how he blew one of his earliest refunds as a young taxpayer on an 8oz Wagyu ribeye and a $300 bottle of wine. 

“If I would have invested that tax return into a matching 401k or Roth IRA account, I would have had thousands by now,” says Vetti. And that’s what he tells his clients, who come to him for help managing their taxes. 

So with Alaska on indefinite hold, he is looking forward to seeing how much he can potentially grow this year’s refund.

“Who knows,” he says. “Maybe sometime in the future that investment will allow me to eat Wagyu steaks with the bears in Alaska.”

Shawn Breyer

Owner of a family-run law firm

Atlanta, Georgia 

Refund Strategy: Build an investment account for their infant daughter

“We had a child in 2020,” says Breyer. “We have opened an investment account…. for her since she cannot own one herself.”

Breyer is planning to put their $3,100 tax credit—that’s the $2,000 child credit plus the $1,100 extra stimulus for 2020 babies—into an exchange-traded fund, or ETF, that tracks the S&P 500. 

“We already invest $250 per month into this account,” Breyers says. “With a 10 percent return and dollar-cost averaging $250 per month, she will have $375,000 when she is 25 years old.”

Alex Willen

New business owner

San Diego, California

Refund strategy: Spend more on inventory to grow the business

Willen is still growing his new premium dog treat business called Cooper’s Treats, after Covid forced the closure of his last venture, a dog-boarding facility.

“Unfortunately, I lost a fair bit of money when I shut that down, so I have had to keep Cooper’s Treats as lean as possible financially,” he says.

Willen is expecting “a few thousand dollars” back this year which he expects will make a big difference combined with his austere business plan. 

“Things are going well with the budget I have,” he says, “but spending my tax refund on inventory will let me get my costs down by buying in bulk, which will really help my bottom line.”

Sarah Frey

Dog groomer

St. Louis Park, Minnesota

Refund strategy: Pad her savings account and pay down some student loan debt

“I was already thinking of putting some of my refund into my savings account,” says Frey, who is expecting “at least a couple hundred dollars” back. “My plans have only been adjusted in that I’ll be putting more than half of it towards savings, with the rest going towards getting myself out of debt.”

Even though Frey is currently working full-time, she is trying to be as financially stable as possible, especially given the ups and downs of the Covid economy. “I’d like to have as much cushion as possible in the circumstances we’re in,” she says. “My day job has definitely experienced some ups and downs with Covid-19. After being shut down in the spring, we booked out like crazy when we reopened. Business overall has still been slower than past years as we opened back up at a more limited capacity.”

Andrew Cunningham

Small business owner

Detroit, Michigan

Refund strategy: Business improvements and thanking their hardworking staff

Andrew Cunningham says he and his wife Karen normally spend their tax refunds on renovating their house, putting finishing touches or making repairs in one room at a time. This year is different. With Covid-19 hitting small businesses hard, they will be putting their refunds right back into their pest control company and their devoted staff. 

“Because of the pandemic, we have decided that both our personal and our business refunds will be going back into the business, but not only that, they will be put towards a summer retreat for our small staff of nine,” Cunningham says, estimating they would be getting back about $8,000 total.

“Our employees have had to take schedule cuts for nearly three months last year until we were able to get things back on track,” he says. Now they are looking forward to 2021 “and we have nothing but our staff to thank for that.”

Consider Stashing it

Have a tax refund coming your way? Consider stashing it in a Stash Retire account.²

The post 2020 Tax Refund on the Way? Here’s How People Plan to Spend Theirs appeared first on Stash Learn.

But filing your taxes doesn’t have to be painful, and if you get organized, it can really help you file more quickly. So, we’ve pulled together this guide to help you navigate basics about filing, including the forms, dates, and recent changes to tax brackets. 

Remember: The sooner you file your taxes, the sooner you’re likely to receive a tax refund, if you’re eligible to receive one.

Check out all of our tax season tips:

The post Stash’s One-Stop Guide to Tax Season appeared first on Stash Learn.

The Internal Revenue Service (IRS) extended the tax filing deadline to July 15 from April 15, 2020, to give people more time, due to the ongoing Covid-19 pandemic. Taxpayers must also make payments if they owe money on their 2019 tax returns by July 15. If you have yet to submit your tax forms for 2020 or make payments on your 2019 taxes, now is is the time to think about filing, or applying for an extension. 

As you’re getting ready to file, here are some things to keep in mind. 

Which tax bracket you’re in 

When you’re filing your taxes, you’ll probably want to know exactly how your income is taxed, according to your income. If your financial situation has changed because of Covid-19, remember that you’re filing for income earned in 2019. Here are the tax brackets for 2019 incomes:

*Source: IRS

*Source: IRS

Remember that you won’t necessarily pay the highest applicable tax rate on all of your income. For example, let’s say you’re single and you make $45,000 annually. You’d pay 10% on the amount up to $9,700. You’d pay 12% on the amount from $9,701 up to $39,475; and then 22% on the amount from $39,476 to $45,000. 

If you got married, bought a house, had kids in 2019, or had some other qualifying event in your  life, you may be eligible for some important deductions. You can find more information about those situations here.

Which tax forms you’ll need

Stash provides tax forms securely online. You can access them through the Stash Invest app by clicking here. You’ll likely have tax forms from Stash if:

• You received dividend payments greater than $10 from your Stash Invest investments in 2019.¹
• You received more than $10 in interest on your Stash Invest account.
• You made a withdrawal from your Stash Retire IRA of $10 or more, or
• You sold an investment in your Stash Invest account in 2019.
• You received dividends on any stock owned, or any stock sold.
• You will also generate a form 5498 if you made a contribution to your retirement account during 2019.

Make sure to download those forms before you start to file.

What to do if you still need an extension

You might still need to extend the deadline for filing your taxes. If so, you can apply for an extension to October 15, 2020. You can submit your application for an extension with the IRS by July 15, 2020.

Remember, the sooner you file, the sooner you’ll receive your refund, if you qualify for one.

The post It’s Tax Time! Here’s What You May Need to Know As Tax Day 2020 Approaches. appeared first on Stash Learn.

If you already invest your money, you probably know that you have to pay taxes on the money you’re putting into the market. But you might not know when or why. In a standard brokerage account, you may have to pay taxes on investments that earn money when you decide to sell them, and on most dividends earned from investments. 

We’ll explain when you might have to pay taxes on your investments, and the different rules that might apply to you.

Taxes on capital gains

If your investments increased in value and you decided to sell them, you will probably have to pay taxes on that sale. This kind of tax is a capital gains tax. Let’s say you buy a share of a stock at $20 and its value increases to $60 while you hold it. When you decide to sell your share at $60, that increase in value, or profit, once realized, is called a capital gain. The profit is “realized” when you sell it. 

There are two different kinds of capital gains, and the amount of tax you pay on those gains depends on this type: 

• Short-term gains are earnings on investments that you held for less than a year.
• Long-term gains are earnings on investments that you’ve held for more than a year.

Short-term capital gains are essentially taxed at the same rate as your ordinary income for federal income tax purposes, and that rate can be nearly twice as high as the rate for long-term capital gains. The top ordinary income rate, for example, is currently 37%. The top long-term capital gain rate is 20%. 

• Good to know: There are seven ordinary income tax brackets ranging from 10% to 37%. There are only three long-term capital gain brackets: 0%, 15%, and 20%. So the longer you keep your money invested, the less you’re likely to pay in taxes.

Say for example that you invest $200 in a company’s stock and the value of your investment increases to $250. If you sell your shares after less than a year, you’ll pay the short-term tax rate on your gains. So if your tax rate is 24% (based on your income), then you’ll pay $12 in capital gains tax. If you sell your shares after a year, you’ll pay the long-term tax rate of 15%, or $7. 

This might seem like a small difference, but the more money you invest, the bigger this difference can be. Remember that you won’t pay taxes on the money you first invested, but only its increase in value once you sell that investment.

Another thing to keep in mind is your capital losses or the losses you incur if you sell an investment that has decreased in value. If you lost more than you’ve gained in a given year, you might be able to deduct that value from your taxable income when you file. 

How dividends are taxed

A dividend is a portion of a company’s earnings, paid out to shareholders. Some people reinvest their dividends automatically with a dividend reinvestment plan or DRIP², which you can set up with your Stash account if you have one. Whether you reinvest your dividends or not, you’ll likely have to pay taxes on dividend earnings, at the same rate as your income is taxed. So if your income is taxed at 24%, dividends you earn are also taxed at that rate. 

An exception is something called a qualified dividend, on which you’d pay the lower long-term capital gain rate. Generally speaking, a qualified dividend is for a stock that you’ve held for a period of 60 to 90 days, usually within a specified window of time counted from something called the ex-dividend date. 

Taxes on retirement savings

Retirement accounts such as 401(k)s, 403(b)s, and both traditional and Roth IRAs can provide you with some tax benefits. Gains in retirement accounts are generally not subject to taxes as long as you make no withdrawals from the accounts prior to age 59 1/2. With the exception of Roth accounts, which are funded with post-tax dollars, you pay ordinary income taxes on the amounts you withdraw once you’ve reached retirement age.

If you close your retirement account prior to reaching age 59 ½, the money you earn will also be subject to taxes, plus an additional 10% penalty. (Generally speaking, if you do something called a rollover, which means you transfer your retirement account from one financial institution to another, there are no taxes or penalties.)

You can learn more about 401(k)s and IRAs here.

Tax forms you should know about 

You may have already filed your taxes this year or you might not have, given that the deadline for filing was pushed to July 15, 2020 due to the Covid-19 pandemic. If you have a Stash account, Stash will provide you with the forms you need regarding your investments. For the 2019 tax year, you can access those forms here.

You will have tax documents from Stash if you: 

• You received dividend payments greater than $10 from your Stash Invest investments in 2019
• You received more than $10 in interest on your Stash Invest account
• You made a withdrawal from your Stash Retire IRA of $10 or more, or
• You sold an investment in your Stash Invest account in 2019.
• You received dividends on any stock owned, or any stock sold.
• You will also generate a form 5498 if you made a contribution to your retirement account during 2019.

If you invest elsewhere, you’ll need to get the above forms and information from the brokerage or company you use to invest. And remember, everyone’s tax situation is different, so remember to do your own research and consider working with a tax professional.

The post How Investments Are Taxed appeared first on Stash Learn.

Life insurance can help protect your loved ones against loss of income and other financial uncertainties in the event of your death. In fact, purchasing life insurance can be an essential part of a smart financial plan, according to some experts, which should also include regular saving and investing.

And purchasing life insurance while you’re young can have particular cost benefits.

Here are five reasons why looking into life insurance is likely to be a good idea.

1. Your premiums can be lower.

The younger you are when you purchase life insurance, the lower your monthly premiums are likely to be. When considering term life insurance, your monthly premium is a fixed amount that stays the same for the term of the policy.

2. It can help replace lost income.

Your wages and salary are essential to your family. Life insurance can help your spouse, partner, or children replace the income you contributed when you were alive. That can include day-to-day expenses, monthly bills, and other common financial obligations.

3. It can help with burial costs.

It may be unpleasant to think about, but the average funeral costs up to $10,000 today. Life insurance can help offset some of those costs.

4. Paying for educational expenses.

If you have children, you’ll want the best for them, especially after you’re gone. A life insurance policy can help fund their educational expenses, whether that’s in a custodial account, or some other educational account, such as a 529. The money can also cover the cost of your remaining student loans, which can be really helpful if you had a cosigner.

5. Paying outstanding debts.

You and your spouse or partner may have a mortgage or other debts, such as credit card or other loans you co-signed together. Life insurance could help with those loans.

Planning your financial future is always a challenge, and the future is filled with unknowns. Life insurance could help your family manage their expenses without you. And the sooner you consider a policy, the cheaper it’s likely to be.

Ready to get covered? Click here to learn more from our partner Bestow.¹

The post How Buying Life Insurance When Young Can Help You Plan Your Future appeared first on Stash Learn.