A Brief Guide to Common Stock Taxes

When it comes to investing in the stock market, some of the most common questions that new investors tend to ask have to do with what kinds of taxes they will have to pay on their stocks.

In general, simply buying or holding on to common stock investments will not trigger any sort of taxable event. It is when you actually collect gains from a stock investment that you will be required to pay taxes on it.

There are really only two situations where you will have to pay taxes on common stock. The first is when you collect a dividend.

When a company releases a dividend to its shareholders, that money becomes taxable income. There are, however, two different kinds of dividends and they are taxed differently from one another.

The first is a qualified dividend. Most domestic companies that operate under standard company structures pay dividends that fall under the category of “qualified.” Qualified dividends are taxed at the capital gains tax rate which can vary based on your regular income tax bracket. A capital gain is any profit from an investment. Any taxes on your qualified dividends will be owed at the end of the year.

For 2015, a single person with $37,450 or less of taxable income will not have to pay any taxes on qualified dividends. Someone who has more than $37,450 and less than $413,200 of taxable income will have their qualified dividends taxed at 15%. Any individual who makes over $413,200 in 2015 will have their qualified dividends taxed at 20%.

For married couples filing jointly, the range to pay 0% on qualified dividends is $0-$74,900, $74,900-$464,850 for 15%, and over $464,850 for 20%.

Non-qualified dividends are any stock dividends that do not fall into the “qualified” category. These include dividends like those from employee stock options. These are taxed at the standard income tax rate ranging from 10%-39.6% in 2015 depending on your taxable income.

The second scenario in which you would have to pay taxes on your stock investments is when you sell them for a profit. When you sell stock for higher than the price you paid for the shares, it is considered a capital gain. However, capital gains from selling common stock are only taxed at the aforementioned capital gains tax rates if they fall into the category of long-term capital gains, meaning you held the stock for longer than a year before selling it.

If you buy and sell stock for a short-term gain in less than one year’s time, then the profits from selling the stock will be taxed at your standard income tax rate, which is usually higher than the capital gains tax rate. For example, if a married couple who made $70,000 in income in 2015 sold stock they held for five years for a profit, they would be taxed 0% on the capital gain. However, if they held the stock for less than one year and realized a short-term gain, their profits from selling the stock would be taxed at 10%.

Additionally, capital losses can be used to offset capital gains for tax purposes.

Keep in mind that these rules are only for investments in common stock. Tax advantaged accounts like 401(k)s or other investments such as mutual funds will have tax rules that are specific to the circumstances of your investment, which is why it is so important to work with a professional who will help you determine the most efficient way to report and pay taxes on your capital gains. Please contact Desnoyers CPA today to learn more.

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Written by Desnoyers CPA

Desnoyers CPA

Known for her friendly, outgoing nature and her rare talent for financial foresight, Lydia Desnoyers has been serving individuals and small businesses in Florida since 2010. After earning her Master’s Degree in Accounting from Nova Southeastern University and her Bachelor’s Degree in Accounting from Florida State University, she became a Certified Public Accountant and a Certified Fraud Examiner.