At this time of year many Americans are starting to think about taxes. We know that figuring out taxes on your investments can be confusing, so here are some things you should know.
Uncle Sam takes his cut
When you sell a stock or mutual fund at a profit, you will usually get taxed. If you sell within the first year you own that security you’ll pay tax at ordinary rates, which could be as high as 37% depending on your income level. But the tax code is designed to encourage long-term investing, so if you hold that same security for longer than a year, you’ll pay a lower rate — a maximum of 20% for most stocks and funds.
Don’t forget your dividends and other income
In addition to profits from selling investments, you pay tax on dividends you receive from your investment accounts. Qualified dividends on stocks and stock mutual funds are eligible for the same lower maximum 20% rate. However, income received on most bond funds — and on the Azzad Wise Capital Fund — are taxed at ordinary income tax rates. All dividends (and interest) are reported on Form 1099 and must be reported on your tax return.
Consider harvesting losses
Afraid you may be looking at a sizable tax bill on your investments this year? You may want to consider harvesting your losses. This is a common technique in which an investor intentionally realizes losses to try to offset gains in the year. However, be careful of the IRS’s wash sale rule, which prohibits investors from claiming a loss on securities sold in a wash sale. A wash sale occurs when you, your spouse, or an entity you control (such as a business) sells a security at a loss and purchases it or a “substantially identical” security again within 30 days. This counts across all taxable accounts.
Advisory services offered through Azzad Asset Management, an investment adviser registered with the U.S. Securities and Exchange Commission. Registration as an investment adviser does not imply a certain level of skill or training. Azzad Asset Management does not provide tax or legal advice, and we encourage you to consult with tax or legal professional advisors before implementing any legal or financial planning strategies.
