Taxes on a Stock Portfolio

by Ron White

Taxpayers who manage stock portfolios during the tax year must follow special rules for these types of investments. The Internal Revenue Service enforces tax laws on stock earnings. Taxpayers only pay tax on stock portfolios when they receive their earnings. Pension plan portfolios, 401k accounts and individual retirement account portfolios do not result in taxes in each tax year. Instead, those portfolios are taxed only when the taxpayer withdraws the funds.

Dividends

Stockholders may receive quarterly dividends on their stock investments. Federal tax laws require taxpayers to include dividends as part of income. Dividends, therefore, can add significantly to an individual’s income and could affect the rate that a taxpayer must pay on their taxable income. In states that require state income tax filing, taxpayers also must report dividends as part of their income and pay tax on the income. Mutual funds earn interest, and the IRS also requires you to include interest earnings as income.

Capital Gains Tax

Taxpayers owe capital gains tax when they sell stocks for a profit. The tax must be paid during the year in which the profits were realized. If taxpayers sell stocks for a loss, they can deduct that amount from capital gains. If the taxpayer had no gains, the taxpayer can deduct up to $3,000 each year from income if filing a married joint return, or $1,500 annually if filing as single or married with separate returns. Capital gains are taxed at a different rate than standard income earnings. The actual rate varies based on the tax rules for that tax year and whether the stock was bought and sold during the same year. The government determines the amount of capital gains based on the basis, or the original cost of the stock. If a taxpayer buys shares of the same stock on different days and for different prices, the taxpayer must clarify within three days of selling the stock exactly when and how much he paid for the stock.

Long-Term and Short-Term Rates

The IRS sets different capital gains rates on short-term and long-term capital gains. Long-term gains result when you sell a stock purchased more than a year ago. The rate for long-term gains for 2010 was 15 percent for taxpayers in income tax brackets above 15 percent. Taxpayers whose income falls within the 15 or 10 percent bracket do not pay any tax on long-term gains. The long-term rate is lower than the short-term rate. For 2010, the short-term rate was 35 percent. Taxpayers have short-term gains when they sell stocks purchased within the past year.

Inherited Stocks

When you inherit stocks, you do not pay a tax on your new financial assets. Instead, you pay tax only if you sell the stocks for a financial gain. The IRS allows the value of stocks to reset. This means that the basis, or beginning value of the stocks, is what the stocks are worth on the day that you inherit them, rather than when the decedent first purchased the stocks. If you sell the stocks for the basis or below, your earnings are not taxed. If you sell the stocks for an amount above the cost basis, you must pay capital gains tax on the amount of the financial gain.

About the Author

Based in Central Florida, Ron White has worked as professional journalist since 2001. He specializes in sports and business. White started his career as a sportswriter and later worked as associate editor for Maintenance Sales News and as the assistant editor for "The Observer," a daily newspaper based in New Smyrna Beach, Fla. White has written more than 2,000 news and sports stories for newspapers and websites. He holds a Bachelor of Arts degree in journalism from Eastern Illinois University.

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