Tax Tips For Investors

Now that brokerage firms have finally issued their annual 1099 forms, I thought it might be a good idea to refresh on some of the key items that affect investors.

  • “Wash” sales. Taxpayers can’t take long-term capital losses on stock sales if they also buy shares 30 days before or after the sale. Exercising stock options counts as a purchase.
  • Dividends. Only “qualified” dividends get a top tax rate of 15%; others are taxed at ordinary income rates. Fortunately most dividends of stocks held longer than two months count as qualified, but check your broker reports to make sure.
  • Losses. Long-term capital losses (those on investments held longer than a year) can be used to shelter an equal amount of long-term or sometimes short-term gains. Up to $3,000 of excess can then be deducted against ordinary income per year, and what’s left beyond that can carry forward indefinitely.
  • Change in reporting sales.  The IRS instituted new reporting rules for brokerage firms.  Now firms must report the cost basis of stocks sold.  Make sure to review the cost basis reported to insure they are correct.  Also, there is a new Schedule D for reporting this information.
  • Employee stock. Be careful with shares that originated as stock options, restricted stock, or employee stock. A discount is recorded on the employee’s W-2 form that should raise cost basis and lower taxes when the stock is sold. But this adjustment is often overlooked.
  • Incentive stock options. The tax treatment of these options can be advantageous but also is tricky. Expert help is a good idea, because there are alternative-minimum-tax consequences both on exercise and sale.

If you have any questions concern your brokerage statements and the related tax consequences please do not hesitate to contact us.

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