Most of us are usually keeping a lookout for better methods of financial security. And, although certain monetary risks can feel overwhelming and stressful, taking a calculated risk once in a’while isn’t a bad thing. Like many other life experiences, it is the leap which often ends up being of great value! So, if you’ve come to “a juncture in the road”, and are left wondering whether to “let it ride” or “get off at the next stop”… here are a few refreshers for this exciting adventure you’ve embraced!
Earning Dividends and Interest
Each time you buy into a stock or mutual/index fund, the associated company will make payments to its shareholder or investor. Whether you call these “Periodic Bonus Payments” or “Dividends”, they will always be seen as a regular taxable income…regardless if you keep those shares in place.
Every time you earn a dividend, you get to choose to reinvest and buy more of a company or keep it and pay taxes on it later. Reinvesting sounds simple enough, but because of the variables involved, getting a professional accountant to weigh in would be considered wise.
The two main concepts if you do sell
When the right time does presents itself to sell those stocks, bonds, or mutual/index funds…that type of profit is considered a Capital Gain, which it’s good to remember you’ll have to pay taxes later on. Speaking of paying taxes later, know that a “short-term” gain (when you sell) adheres to the normal tax rate of up to 35%. This being in contrast to the fact that, if you hold shares for longer than a year the tax rate gets lowered to a possible 15%. It’s these type of incentives which can definitely bring a bit of thrill to holding out.
These things happen. But, what do they mean exactly? Well, there’s a saying “sometimes you just have to cut your losses”! Which translates into needing to sell your investment for less than you invested in. Hopefully, you were able to make some profit on a few of those stocks. If so, it is possible to claim losses against the capital gains and in essence, pay a lower tax debt. (Basically, in the pool of both losses and gains you’d be adding the negatives and positives to come up with a more rational, more fair figure.)
Because the vernacular on Investing is constantly being revamped, it’s best to try and stay on your toes when it comes to investment verbiage. Stay informed with recent methods of terms used, conditionals and procedures. And if you find you’re still scratching your head, send thedigitalCPA an email, we truly enjoy helping others gain financial understanding—of any kind.