Investment Gains or Losses Affect Your Taxes

If you sold an asset such as stocks, bonds or mutual funds in 2007, you may owe taxes, says Pat Swanson, CFP® and families specialist with Iowa State University (ISU) Extension’s Invest Wisely Project (www.extension.iastate.edu/investwisely).

“Stocks, bonds and mutual funds are assets, which, when sold, can provide you with either a capital gain or loss. Long-term capital gains or losses occur when these assets are sold after owning them for more than 12 months. Long-term gains get special treatment under current tax law. For taxpayers in the lowest two tax brackets of 10 and 15 percent, long-term capital gains are taxed at 5 percent on 2007 tax returns but there will be no long-term capital gains tax in 2008. All other taxpayers pay 15 percent on long-term capital gains.”

Swanson explains that short-term capital gains or losses occur if the asset is held for 12 months or less and then sold. “Short-term capital gains are taxed the same as regular income.”

Swanson describes the process to determine whether you have a net long-term or short-term capital gain or loss. First you subtract long-term capital losses from long-term gains and then subtract short-term capital losses from short-term gains. If both result in gains, these amounts are taxed accordingly. If you have a net long-term capital gain and a short-term capital loss, the loss is subtracted from the gain. “For example, assume a taxpayer has a $5,000 long-term capital gain and a $4,000 short-term capital loss. The taxpayer will have a net value of $1,000 long-term capital gain to be taxed at a maximum of 15 percent.”

If the calculation yields a net capital loss, the taxpayer can deduct $3,000 of these losses against other income. “Any loss greater than $3,000 can be carried forward to future years and used to offset capital gains or as a maximum $3,000 deduction against ordinary income,” Swanson says.

Dividend income from stocks is taxed at 5 percent for 2007 tax returns (0% in 2008) if the taxpayer is in the 10 or 15 percent tax brackets or 15 percent for higher tax brackets. “If you own a mutual fund you will pay taxes on the dividends and capital gains earned by the mutual fund. You will receive a 1099 form from the mutual fund company that will identify the amount you will pay tax on. When you sell your mutual fund shares, you will have a final capital gain or loss to deal with,” Swanson concludes.

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The ISU Extension Invest Wisely Project provides a series of newspaper, radio, and web resources for investors.  It is funded by a grant from the Investor Protection Trust (IPT).  The IPT is a nonprofit organization devoted to investor education.  Since 1993 the IPT has worked with the States to provide the independent, objective investor education needed by all Americans to make informed investment decisions.  www.investorprotection.org.