True Financial Returns

In today’s technological landscape, there are many platforms that allow easy access for almost any person to make an unlimited array of investment decisions. One thing often overlooked by investors and some investment professionals are the tax consequences of these investments. Taxes can cut an investor’s actual return quite substantially. Whether forgotten or unknown, these tax consequences are unavoidable once the annual requirement of filing a tax return comes around. If the tax consequences are not planned for or understood in their entirety, it can often lead to the unnecessary stress of scratching together cash to foot an unexpected tax bill.

That is why it is important when looking at investments or various investment choices to consider after-tax returns. After-tax returns are the net profits made on an investment with their respective tax consequences in consideration. This provides a more accurate representation of return.

The easiest way to mitigate taxes from investing and potentially make the biggest impact on your bottom line is understanding the differences between short and long-term capital gains. Capital gains are the appreciation of an investment position over the amount of which you acquired the position. Under current tax code, capital gains are taxed only when an investment position is sold and the gains are said to be realized. For example, if you bought one share of Apple for $5, and then sold that share of Apple for $125, you would have realized or gained an amount of $120 ($125-$5). This difference of $120 would be considered a capital gain and would be taxed at capital gains rates. Depending on your overall tax situation, capital gains can be taxed at anywhere from 0% all the way up to 37%! The drastic difference in this range of tax rates on capital gains depends whether they are considered short-term or long-term gains.

Short-term gains are a result of positions that are bought and sold in less than one year. Short-term gains are taxed at the investor’s ordinary income tax rate, which can be up the high side of the scale, up to a staggering 37%! On the other side of this, are the stock positions held for longer than one year. Once a stock is held for longer than one year and then sold it becomes taxed at the more lucrative long-term capital gains rates. The highest long-term capital gains can be taxed at is 20%. This could lead to a big difference in your investment returns after-taxes are considered and a huge difference in your taxes owed at tax time.

Using this information to derive a true, after-tax financial return can make a major difference in any investment decision. This will additionally, allow for adequate planning to reduce the chances of an unexpected tax bill. Consider building your financial team to consist of a CPA and CFP® professional who understand the nature of investing with a mind for mitigating taxes.

Published in the Victoria Advocate

Christopher Laughhunn CPA/CFP® is the Tax & Accounting Principal for Keller & Associates CPAs, PLLC.