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If you own shares of a mutual fund you may be paying too much in taxes through a common pitfall that catches many investors. When you sell shares of a mutual fund you have to pay capital gains taxes. In the most simple transaction that is calculated using the following method:
(sales proceeds – original purchase amount) * the capital gains tax rate
But life is usually a little more complicated than that. The above formula assumes you bought shares of the fund and held them, never having any additional purchases, sales, or reinvestments. In the above scenario, the “original purchase amount” is also known as your tax basis, or cost basis.
In real life many investors choose to have their dividends and capital gains distributions reinvested in more shares of the fund. This is a great way to accumulate more shares of the fund. It’s also a potential tax pitfall if you don’t watch what you’re doing when you sell those shares.
As those reinvestments occur they are essentially buying more shares for you with the distributions in lieu of your receiving cash. (Keep in mind, though, that you are taxed on the distributions as income in the year they occur. Because the income was credited to your account, it could have been paid out to you, and therefore is taxable in the year it is paid, regardless of whether you buy more shares with it or not.)
What that means is that your tax basis increases, thereby adjusting the tax calculation you have to make when you calculate your capital gains tax upon sale of the shares. Your original purchase price is still part of the tax basis, but instead of having it stop there you also add the total amount of reinvested income. So if you bought shares for $1,000, and received reinvested dividends of $100, your adjusted tax basis is now $1,100.
Then the formula then goes something like this:
(sales proceeds – adjusted tax basis) * capital gains tax rate
Using the above example, let’s say you sold your shares for $1,500 for a long term capital gain at a rate of 20%.
$1,500 - $1,100 = $400
$400 * .20 = $80 capital gains tax
Since your additional purchases (earned through reinvestment of income) increased your adjusted basis, the amount of net proceeds is less, thereby lowering your overall capital gains tax rate. If, however, you failed to take this into account you will have ended up paying tax on the reinvestment as income when received as well as paying capital gains taxes on it when the shares are liquidated.
What else can I help you with?
Is a gift tax deductible?
No. In fact there may be a tax - the gift tax - that needs to be paid by the one giving it...although if done properly it can normally be easily avoided.However, in the case of property whose value at the time the gift is given exceeds the donor's basis, a portion of the gift tax paid can be used to increase the basis of the property in the recipient's hands. I won't go into the rules for calculating the how much of the gift tax is added to the basis, it's rather complicated. But increasing the basis does have the effect of decreasing the amount of taxable income the one you give it to will have when they sell the property.
Which type of tax is calculated on a per-item basis?
An excise tax or sales tax is calculated on a per-item basis
When calculating sales for revenue do you include sales tax?
No.
Is the FL Accrual Basis or Cash Basis with Sales Tax?
cash basis
What tax are you most likely to pay on a regular basis?
sales tax
Is a gift tax deductible?
No. In fact there may be a tax - the gift tax - that needs to be paid by the one giving it...although if done properly it can normally be easily avoided.However, in the case of property whose value at the time the gift is given exceeds the donor's basis, a portion of the gift tax paid can be used to increase the basis of the property in the recipient's hands. I won't go into the rules for calculating the how much of the gift tax is added to the basis, it's rather complicated. But increasing the basis does have the effect of decreasing the amount of taxable income the one you give it to will have when they sell the property.
Do you typically include the tax amount when calculating your tip at restaurants"?
Yes, it is customary to include the tax amount when calculating your tip at restaurants.
Do pilot calculating?
Pilots calculate on a daily basis.
Which type of tax is calculated on a per-item basis?
An excise tax or sales tax is calculated on a per-item basis
Which type of tax is calculated on per item basis?
An excise tax or sales tax is calculated on a per-item basis
Does sales tax round up when calculating the total cost of a purchase?
Yes, sales tax is typically rounded up when calculating the total cost of a purchase.
When calculating sales for revenue do you include sales tax?
No.
While calculating Debt Service Coverage Ratio which income needs to be considered after tax or before tax?
after tax
Does DTI include property tax when calculating a borrower's debt-to-income ratio?
No, DTI typically does not include property tax when calculating a borrower's debt-to-income ratio.
Is the FL Accrual Basis or Cash Basis with Sales Tax?
cash basis
What is the process for calculating and withholding PTO tax from employee paychecks?
The process for calculating and withholding PTO tax from employee paychecks involves determining the value of the PTO hours used by the employee, calculating the applicable tax rate, and deducting the tax amount from the employee's paycheck. This ensures that the employee pays taxes on the monetary value of their PTO benefits.
Do consumers from Illinois pay sales tax on shipping?
No. Shipping is not to be included when calculating sales tax.
