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Taxable account Please help ?
Old 06-13-2012, 04:03 PM   #1
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Taxable account Please help ?

I started a taxable account with total stock market. I'm confused on taxes Right now it's showing a $2200.00 gain at the end of the year on taxes I will need to pay on dividends and on capital gains is this correct. ?

Next question I will have another $20 k to put in in a few months I don't have to pay any taxes on that only what I make on it ?
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Old 06-13-2012, 06:28 PM   #2
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Quote:
Originally Posted by Snowx800 View Post
I started a taxable account with total stock market. I'm confused on taxes Right now it's showing a $2200.00 gain at the end of the year on taxes I will need to pay on dividends and on capital gains is this correct. ?

Next question I will have another $20 k to put in in a few months I don't have to pay any taxes on that only what I make on it ?
First, let me note that I am no tax guru; there are many others on this forum who have forgotten more about taxes than I will ever know. That said, let me take a crack at what I think you're asking.

I assume that you mean you have invested money in a mutual fund (maybe Vanguard Total Stock Market or something like it). Most mutual funds will report two figures to you in a Form 1099 sent at the end of Janaury. These figures will be dividends and capital gains distributions for the year just past. These are attributed to every share of the fund that exists on the date that the the distribution was made, even if you bought it the day before. You will need to pay taxes on these amounts.

Separately, you will have a tax basis in the shares that you bought, which is your purchase price per share. If you sold shares during the year, you will have a capital gain or loss depending on whether the price at sale is higher or lower than the price at purchase. I believe this is also reported to you using a average cost per share methodology unless you specify a different method (such as FIFO or LIFO). If it is a gain, you will pay taxes on that amount. If, however, you don't sell any shares during the year, you have not recognized a gain or loss for tax purposes, and hence you don't pay taxes, even though your account value shows that you are up for the year.

To recap -- you will have to pay taxes on the dividends and capital gains distributions reported on the Form 1099. You don't otherwise pay capital gains taxes unless and until you sell shares. The mere fact that your account has risen in value is not taxable in and of itself.
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Old 06-13-2012, 07:28 PM   #3
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Gumby's spot on.

I presume the $2,200 "gain" is the increase in value since you bought those shares. Since you still have the shares, it is an "unrealized" gain and would not be part of your tax return. If you sold the shares tomorrow, the $2,200 unrealized gain would become a "realized" gain and would be included in your 2012 tax return that you file in early 2013.

If you don't sell the share and realize the gain, the gain is not taxable.

You will likely receive dividend distributions and and possibly capital gain distributions (where the fund has sold individual securities held by the fund at an amount in excess of the cost to the fund) and these would also be included in your tax return. Typically these might be 1-5% of the value at the beginning of the year so usually it isn;t a big deal.
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Old 06-13-2012, 07:38 PM   #4
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Thanks guys you both were right on what I was trying to say. I have no plan selling for a long time so no need to worry about capital gains for many years. Thanks again you guys are great.
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