Have you ever owed taxes without understanding why? A common reason people owe taxes despite taking out the maximum amount from their salary over the year is because of capital gains. As tax season rolls upon us once again, it’s a good idea to understand what capital gains are, whether or not you have them, and how you can help offset the amount of capital gains taxes you might owe when you get your tax return.
What Are Capital Gains Taxes?
Capital gains are the amount you earn after selling certain assets, such as investments. So, for example, if you have stock in a company and you sell that stock after it earns $1000 more than you paid for it, you have a capital gain of $1000. That money is reported to the IRS and taxed. Sounds simple enough, right?
How Capital Gains Can Get Complicated
Here’s the thing. Often, someone invests in something like a mutual fund, someone else is managing that portfolio, which contains several stocks in a few different companies. That portfolio manager is going to act in your investments’ best interest, so they might sell stock without you even realizing. The earnings from selling different stocks are distributed to shareholders (that’s you and the others who invested in those stocks) towards the end of the calendar year, and often are reinvested in the stock company so you own more shares and have more earning potential. That means you may earn capital gains without knowing, and, suddenly, you owe money to the IRS on earnings you never even saw in your bank account because it’s been reinvested.
What You Can Do About Capital Gains Taxes
When you owe taxes because of capital gains, that’s not a bad thing. It means you earned money through your investments. It can feel like something negative, though, when you owe several thousand dollars that you may not have just sitting around waiting to pay to the IRS. With a little planning, though, you can take action to make sure you’re prepared.
Here are a few tried and true strategies to getting ahead of your capital gains taxes:
1. Report Business Expenses
Did you know there are certain business expenses that are tax deductible? These can include courses you took to learn new skills, fees for professionals hired to provide a service for your business, and even things like costs for public transportation and advertising. These costs can be deducted from your total earnings for the year and can help offset the amount of taxes you owe.
2. Report Charitable Giving
When you make charitable donations, you often get a receipt from the company you donated through. That receipt can be used to report your donation and receive a tax deduction.
3. Save Money for Taxes
Just like you need to be financially prepared for unexpected expenses in life such as a burst pipe or a large medical bill, it’s also smart to be prepared for unexpected taxes owed. If you owe money to the IRS and you don’t pay it on time, you could face large fines and end up in tax debt. It’s a smart idea to put some money away each month so that you have enough to pay should you owe anything on your tax return.
We Can Help You Prepare for Tax Season
At DeSantis, Kiefer, Shall & Sarcone, our experts can help you prepare for those capital gains taxes, and unexpected taxes of any kind, so that you don’t have to worry about your tax return. If you need any assistance with navigating tax season, we are here to help!