One of the first steps to successful investing is to get a firm understanding of what you actually pay taxes on. There are several different things that the IRS will be looking at, specifically any interest-bearing investments or dividend-paying investments. So basically, if your investments pays any type of dividend or interest, you are responsible for the tax on that money. You can also be taxed on things like capital gains or any foreign investments as well, but not all investment income is taxed at the same rate or in the same way.
Since every type of income is different, the amount of tax you’ll pay on that income varies depending on many factors. The IRS looks at the type of investment you made and the specific tax laws in the area that you live. Many investment opportunities are also held in a tax-sheltered plan, so that can have a big impact on the amount of tax you’ll be responsible for, plus your income has a lot to do with tax amounts as well. Suffice it to say, tax laws around investments can be complicated, so getting the support of a qualified tax lawyer is crucial to ensuring you handle your money correctly.
There are some types of investments that are called “tax-sheltered” plans. Basically that means you don’t pay any tax on what you earn, but that’s only while your money is in the actual investment or plan. However, if you take any money out at all, that income is fully taxed as taxable income. A few examples of these types of plans are Registered Retirement Savings Plans, Registered Retirement Income Funds, Registered Education Savings Plans and Permanent Life Insurance Plans. There are also some tax-free savings accounts which let you save money totally tax-free for any goal you wish.
Another way to reduce the amount of taxes you owe due to your investments is through any capital losses. Basically, once the tax season rolls around, you will need to add up all of your gains and losses from all your investments. If, when the math is done, you have a gain to report, then you will be taxed on that amount. If you lose money, however, then you declare a net loss and that cannot be used to offset your other sources of income. Be sure to consult your accountant or tax lawyer for some help though, because you can carry a net capital loss back for three years or carry it forward indefinitely. This one definitely gets complicated, so professional help will be crucial.