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What Every Investor Needs to Know about Taxes

What Every Investor Needs to Know About Taxes

Key Takeaways

1. Your 2022 tax refund is likely to be smaller than in 2022

2. Tax advantage of every tax credit you can

3. Do Some year-ed tax planning

4. Passive income often has tax advantages

5. Tax deductions from rental property

6. Taxes on investments

Your 2021 Taxes

Your tax refund for 2022 is likely to be smaller

Various tax relief measures were put into place in the last year of the Trump administration, and especially during the first year of the Biden administration, that resulted in big tax refunds for many American taxpayers in 2021. But your 2022 tax refund is likely to be a lot less because many of those measures expired.

A lot of the tax benefits put in place last year, a lot bigger credits, a lot more credits, stimulus money, all of that goes away for the 2022 tax filing season.

If your 2021 tax refund was like many taxpayers it averaged over $3,000. But for 2022, three tax credits are now gone or reduce.

  1. The child tax credit went up to $3,600 per child, fully refundable. That's now $2,000.

  2. The dependent care credit, which went up to $8,000, dropped back to $2,100.

  3. The earned income tax credit for taxpayers with no kids dropped from $1,500 to $500.

All three of these popular tax credits went back to pre-pandemic amounts, largely because they were blocked by Republicans and U.S. Sen. Joe Manchin.

Another credit, the charitable tax donation, put in place for 2021, goes away if you don't itemize. This could be as much as $300 per person.

This year only about nine percent of taxpayers who itemize their taxes can deduct their charitable donations.

Year-end tax planning tips

With one month to go before the end of the tax year, is there anything taxpayers can do to maximize their tax refunds?

For 91 percent of taxpayers who take the standard deduction and do not itemize, make sure you take advantage of every available tax credit even if they are lower this year than last.

These include the education credits, earned income credits, child tax credits and dependent care credits. You can claim these if you qualify, even if you don't itemize and these should help you get a tax refund for 202. You can also increase your tax withholding for December or put some additional money to your 401(k) or company deferral. You should always try to maximize 402(k) deductions if you can.

You should also look at alternative energy credits that are in play if you do home improvements that were expanded as part of the pandemic,"

To maximize your tax refund for 2021, make an appointment with your tax preparer to see what might work for your situation. But to really maximize your tax refund you really need a long-term strategy, not a last-minute one.

What is a Tax on Active and Passive Income?

Two types of income are subject to federal and often state taxes:

• active income

• passive income.

Active or earned income includes wages from a job or business venture, bonuses, self-employment income, payments from pension and social security payments.

Your active income is subject to tax at federal and state levels. Taxes are paid on active income by every employed citizen of the United States, every self-employed citizen who declares an annual business profit and every retired person who has earned income above certain limits.

In total, about 59.9 percent of U.S. households paid income tax in 2022. The remaining 40.1 percent of households paid no individual income tax. In that same year, about 47.1 percent of U.S. households with an income between 40,000 and 50,000 U.S. dollars paid no individual income taxes.

Active income makes up 88% of the entire tax fund of the USA including social security taxes jointly pad by you and your employer.

Passive income is income earned without an active effort on the part of the individual receiving the income. Passive income is often taxed at a lower rate. Tax on passive income is a term used to describe the taxation of earnings from:

Investment income: Interest, dividends, and capital gains from investments are all considered passive income. Long-term capital gains are taxed at a preferred 15% tax rate, where short-term gains are taxed at your regular tax rate.

Rental property: Income from renting out property is considered passive income. Investment properties allow for the generation of passive, recurring net income and potential profits from property value appreciation.

  • Royalties: Royalties from books, songs, or patents are considered passive

What is Capital Gains Tax?

A capital gains tax is the tax on profits realized on the sale of a non-inventory asset. The most common capital gains are from selling stocks, bonds, precious metals, real estate, and property.

Rental Property Can Reduce Your Taxes

As a rental property owner, you can claim deductions to offset rental income and lower your taxes. You can deduct qualified rental expenses including the mortgage interest, property taxes, interest, and utilities), operating expenses, any travel and repair costs from rental income you receive. (Even while those rent payments should be covering all of these costs anyway). Here is a list of 15 expenses you can claim from owning rental property.

You can also depreciate the cost of buying and improving the property over its "useful life," generally 27.5 years. Claiming depreciation on a rental property can result you having a net loss for tax purposes, such that none of your rental income actually hits your taxable income line on your tax return.

How to Eliminate Capital Gains

One of the first ways to eliminate capital gains is by generating other capital losses. Let that sink in. This sentence will have a meaning in a minute.

Capital gains can be offset by capital losses. If at year-end you have stocks you have held and they have lost value, selling them and taking the lost to offset capital gains can be one way to reduce your taxes. This is limited to $3,000 a year, but you can carry forward losses to future tax returns.

Dividends are a type of investment income paid out by a company to shareholders regularly. Unlike other types of income, dividends are not earned through diligent active work but are generated passively by owning shares in a company.

While dividends can provide a helpful income stream, they are also subject to market fluctuations and can go up or down over time. For this reason, it is important to diversify one’s portfolio and not rely too heavily on dividends as a source of income. Although they can be a valuable part of an investment strategy, dividends should not be investors’ only source of income.

How to Use Dividends in Your Favor

Money that comes from dividends is from the company’s profit. This split of profit is known as the payout ratio.

The amount of your dividend payments depends on the number of shares you own. Some companies have increased their dividend payouts for 50 years, making them great for passive income. Dividend income is taxable at your individual tax rate, even if you reinvest those dividends, But reinvested dividends will continue to earn you more dividends in the years ahead, so go ahead and pay that tax with a bit of joy.

Mutual Fund and Exchange Traded Fund Taxes

Toward the end of the year mutual fund shareholder face potential tax consequences. That’s because mutual funds must distribute any dividends and net realized capital gains earned on their holdings over the prior 12 months. If your mutual fund or ETF is held in a taxable account, distributions are taxable income, even if the money is reinvested in additional fund shares and they have not sold any shares.

But for Investors in tax-advantaged accounts, such as individual retirement accounts (IRAs), 401(k) accounts, and other tax-deferred savings plans, taxes on earnings like capital gains and dividends are not taxed as long as the money remains in the account and no withdrawals are made.

Taxable gains in a fund potentially could be offset by realized losses on sales of other investments in an investor’s portfolio.

One more thing to take note of, reinvested distributions are considered part of the your cost basis as an investor. This could significantly reduce the taxable capital gains realized when fund shares ultimately are sold by the investor, especially if the fund has been held for a long time.

There is a lot to learn about avoiding tax payments. It’s important to stay educated and partner with a tax professional or CPA who can prepare you for the world of gaining wealth while keeping your taxes as low as legally possible.


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