Taxes Paid by your Investments

Double Your Money in One Year!

Back in March 2009, I gave a “buy” recommendation on Ford Motors Company Stock. I suggested that you, the speculator buy this for your IRA and for other accounts at or below $7.50 per share. I felt that below $7.50, your risk of capital would be very low. The stock sold for as low as $1.50 and is now selling for a recent price of $11.72. I also said to sell half your investment when the stock doubles. For example, if you bought 200 shares of stock at $6.00 on May 1, 2009, you would have $1,200 in this investment. If you sold 100 shares of your 200 shares for $1,200 ($12 per share), you would get your original investment back. Now your other 100 shares can maximize your profit at no risk to you.

Federal and Pennsylvania State Taxes

You ask, but what about my tax situation? If you are buying and selling stocks and bonds in your IRA account, your taxes are deferred to when you withdraw the money from your account. You can do that at age 59 ½ or later without penalty. Before you turn 59 ½ you pay a 10% penalty on any money withdrawn from your IRA account (special circumstances in the tax law excluded) plus you pay tax as income on the money. Over 59 ½, you pay taxes on the money withdrawn in the year of withdraw per the tax law at that time with no penalty.

What if I buy and sell in a Regular or Margin Account?

Let’s say that you sold 200 shares in less than one year and one day after purchase. For argument sake, let’s say you are in a 25% tax bracket ($33,950 to $82,250 if single. $67,900 to $137,050 if married filing jointly). You would pay $300 in federal taxes and $36.84 in Pa State Income taxes (Pa Rate 3.07%). ($1,200 times 25% equals $300 and $1,200 times 3.07% equals $36.84 that you have to pay). But if you wait until after one year and one day after buying the stock, you would have a long term gain. That means that you pay $60 to the IRS and $36.84 to the state. ($1,200 times 20% equals $240 because it is a long term gain. $240 times 25% equals $60 in federal taxes you have to pay. For you Pa. State tax it is the rate of 3.07% times $1,200 equals $36.84).

In our example, a long terms gain has you paying a total tax bill of $96.84 while a short term gain gives you a tax bill of $336.84. So the trick in a regular investment account is to try to sell your investments with a long term gain instead of a short term gain.

Let’s say that you did this transaction above and sold 100 shares in less than one year and one day after purchase. You invested $600 and you made $600. You would pay $150 in federal taxes and $18.42 in Pa State Income taxes (Pa Rate 3.07%). ($600 times 25% equals $150 and $600 times 3.07% equals $18.42 that you have to pay). That is a total of $168.42 on a $600 profit. But if you wait until after one year and one day after buying the stock, you would have a long term gain. That means that you pay $30 to the IRS and $18.42 to the state. ($600 times 20% equals $150 because it is a long term gain. $150 times 25% equals $30 in federal taxes you have to pay. For you Pa. State tax it is the rate of 3.07% times $1,200 equals $36.84). You pay a total of $66.84 in state and federal taxes on a $600 profit.

Tax information given by Joyce Hamburg is a Tax Associate of H&R Block, Uptown Shopping Plaza, Harrisburg, Pa. 17110, 717-238-4301.

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