Brokerage Fees and Tax Deductions
Many investors put money to work within financial markets with the goal of establishing independent wealth over the long-term. When building wealth through stocks, however, you will be responsible for paying brokerage fees and taxes, which will subtract from your bottom line. Familiarize yourself with tax law as it relates to investments – so that you may take the proper deductions.
Capital Gains Taxes
In terms of investments, you will owe taxes on dividend payments, interest income, and realized capital gains. You realize capital gains – when you sell an investment at a profit. Brokerage fee deductions relate to how you account for capital gains.
Calculate Capital Gains and Losses
To calculate capital gains, you must first determine your basis for buying and selling stock. Basis includes brokerage commissions within the costs of and money received for shares of stock. For example, your brokerage may charge commissions of $10 per trade. If you buy 50 shares of Corporation Z at $100 per share, your cost basis would be $5,010 (50 shares X $100 = $5,000 + $10 commissions = $5,010). Later that year, you could sell these 50 shares of Corporation Z for $150 per share. Your basis on the sale would then be $7,490 (50 shares X $150 = $7,500 – $10 trading commissions = $7,490). You will owe taxes on $2,480 worth of realized capital gains.
Short-term and Long-term Capital Gains
For tax purposes, capital gains are categorized as either short-term or long-term capital gains. As of 2013, you must own stock for more than one year to qualify for long-term capital gains tax treatment.
Short-term capital gains are taxed as ordinary income rates, which range between 10 and 39.6 percent. Long-term capital gains, however, are tax-free or taxed at maximum 15 percent rates. For tax-free long-term capital gains, you will need a taxable income of less than $34,000 as a single filer. This income limit doubles to $68,000, if you are married, filing jointly.
Realized Capital Losses
If your investments fail to perform, you can deduct realized capital losses from your taxable income. You realize capital losses when you sell stock at a loss. Again, you will include brokerage commissions within your basis calculations. Be advised that realized capital losses are only deductible to a certain point. For tax purposes, you generally have a limit of $3,000 worth of deductions on realized capital gains. If you are married, but choose to file as single, this limit is halved to $1,500. Realized capital losses in excess of these limits can be carried forward to be deducted in later years.
Tax law shifts each year, according to the political and economic environment. To stay up to date, it is important that you pay close attention to party agendas. The IRS provides detailed instructions for completing your taxes within its 1040 booklet.