When you have stocks, you have to think of how they will affect your taxes each year. Additionally, if you plan on leaving your stock portfolio to your children when you die, you will have to plan for how that will affect their taxes. An estate planning attorney will help you determine the best way to set up and pass your stock portfolio onto your children. Tax attorneys will also advise you on claiming profits and losses from your stocks each year.
Short-Term and Long-Term Gains
If you keep stock for less than a year, it is considered a short-term stock and is taxed at your regular tax bracket rate. However, if you keep a stock longer than a year, the percentage is lower. As of 2019, you won’t pay taxes on gains from your stocks if you are in the first three tax brackets. If you are in the other tax brackets, you will pay 15 percent or 20 percent on any gains for long-term stock profits. Because short-term gains are taxed higher than long-term gains, you could offset some of your tax obligations if you have losses on short-term stocks.
Dividends and Interest
If you receive dividends or interest, or both, on your stock portfolio, you will have to pay taxes on those sources of income. This is even if you did not sell any of your stocks. You might also receive interest on bonds or mutual funds—that interest is also taxable.
When selling stocks, you do not pay taxes on the entire amount. You only pay taxes on the gain. To find the gain, subtract the purchase price from the selling price. For example, if you bought stock from ABC Corporation for $2 per share and sell it for $10 per share, you will pay taxes on $8 per share.
The exception to this rule is if you leave the stock to your spouse or children. The stock is valued at your death. Using the same example of stock, that stock is worth $10 upon your death. Your children inherit the stock and choose to sell it immediately at $10 per share. Your children would not pay taxes as there is no gain. However, if your children hold onto that stock until it reaches $20 per share, your children would pay taxes on $10 per share ($20 per share current value minus $10 per share worth upon your death).
Losses and Planning Ahead
If you plan on leaving a stock portfolio to your spouse or children, you should plan ahead of time for taxes each year. You might set aside a percentage of the capital gains tax you paid on the stock so you have it at tax time. You may also have a percentage of your income go directly into an account set up just to pay taxes on the stock. That account could be kept in a revocable trust so that any excess will be passed onto your heirs.
You may have other stocks that take a loss—some of the gains may be offset by some of the losses. However, the losses are calculated in a specific way. All short-term investments are calculated for tax purposes, then all long-term investments are calculated. You may use the losses from the short-term investments to offset the gains from some of the long-term investments.
You should prepare your heirs long before your death for receiving your stock portfolio. Even if they do not decide to keep some or all of the stock in the portfolio, your heirs could still end up paying taxes. A stock could gain nothing to several dollars or more per share in the matter of a day or two of them inheriting it.
Contact France Law
Things could become very complicated when dealing with stock and taxes, especially if you are claiming taxes on the stock that you inherited. If you have a stock portfolio, bonds, mutual funds, retirement accounts or other financial accounts, contact France Law Firm to help you set up your estate.