While it's nice to earn money on your investments, unless they're in a retirement account, you need to pay taxes on the earnings whether or not you withdraw the money from a brokerage account. For regular nonretirement investment accounts, withdrawing money doesn't trigger any taxable event. You have a tax liability when you receive income from interest and dividends or sell your stock or other assets not when you withdraw from an investment account. The type of income you earn affects how you calculate the amount of tax due.
You should receive tax information from your investment brokerage in January of each year, including tax forms such as a Form 1099-DIV and Form 1099-B. These forms show your capital gains, interest, dividends and capital gains distributions, ready to be entered in the appropriate Form 1040 boxes to figure your federal taxes.
Your Brokerage Account and Taxes
Any stocks you sold and profits you received, regardless of what you withdraw from an investment account, may have a capital gain if the stocks sold for more than the price you originally paid. The Form 1099-B provided by your brokerage contains a list of each stock and its selling price, so you can calculate the gain or loss if the shares sold for less than their purchase price. While gains from stock sales trigger taxes, claiming any losses on stock sales reduces your tax liability.
The tax you pay on capital gains is determined by how long you owned the stock. Stock you owned for longer than a year are taxed at the long-term capital gain tax rate, which ranges from zero percent to 20 percent for and 2017 2018 depending on your income bracket. The 2017 Tax Cuts and Jobs Act did not affect capital gains tax rates. Any stocks you sell after owning them for less than one year are taxed at the short-term capital gains tax rate, which is the regular tax you pay on your ordinary income. To minimize taxes, it makes sense to hold on to your investments for longer than one year when possible.
Reporting Interest Income and Dividends
If you receive any interest income in your brokerage account, you'll find this amount reported on Form 1099-INT. Usually, regular interest income receives the same federal tax rate that you pay on your regular earned income. However, if you own any municipal bonds, either directly or through a municipal bond fund, you may be able to exempt this interest from your federal taxes. Additionally, you might also be able to exempt the interest from your state taxes if the interest was paid in your home state.
If you own a money market fund or dividend-paying stocks, you may have received income from dividends. Dividends fall into two categories, either qualified, which receive special tax treatment, or nonqualified, which are taxed at your regular income tax rate. Most U.S. companies that issue common stock pay qualified dividends to stockholders who hold on to their stock for longer than 60 days. Qualified dividends receive lower tax rates than regular income tax rates, which range from zero to 20 percent depending on your income tax bracket.
Specially Treated Retirement Accounts
If you have tax-deferred retirement accounts and have reached retirement age, you won't owe any taxes on your investment growth or earnings until you withdraw the funds, and then you pay your ordinary income tax rates on any withdrawal funds. For a Roth IRA or Roth 401(k) account, you don't owe any taxes on withdrawals because the money was taxed before you added it to the account.
2018 Tax Law Changes
As of 2018, the ordinary income tax rate brackets are changing so many taxpayers will owe less tax on ordinary income, including unqualified dividends, interest and short term capital gains. Capital gains rates are essentially unaffected.
When filing time comes, the 1040 Form is also changing in format, though this may affect you less if you use digital tax filing tools.
2017 Tax Law Considerations
Ordinary income tax rates are generally higher in 2017 than in 2018, which could mean some investors paying more in tax for dividends, interest and gains realized that year.
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