Paying Taxes on Your Investment Earnings

One of the things that it is sure in this life is this: If you find a way to make money, the government will find a way to collect taxes on it. This is true of investments. No matter the investments you have, you will pay taxes on them in some way, shape or form. Here are a few of the ways you pay taxes on your investment earnings:

Short term and long term capital gains

When you hold investments, they are categorized as short term (less than a year) and long term (a year or longer). It is important to note that you pay taxes on them very differently. For short term capital gains, you pay taxes on your earnings as though they are regular income. Long term capital gains, on the other hand, require a formula to figure out. You can figure the taxes up yourself, but if you have a complex tax return, it might be better to have a professional do it.

Real estate investments

When you sell real estate that you have, there is a capital gains tax if you managed to sell it for more than you bought it for. However, for a primary residence, you don't have to pay taxes on gains that amount to less than $250,000 ($125,000 if you are single). Other property though -- second homes, vacation homes, investment property, land -- is taxed when you sell it. However, through a proper exchange, it is possible to minimize your capital gains taxes.

Retirement account withdrawals

Retirement accounts are tax deferred. This means that you don't pay taxes on the earnings until you withdraw them. You do get a tax deduction for traditional retirement accounts (IRA and 401k), but when you withdraw the money down the road you have to pay taxes on the earnings. With Roth retirement accounts, the rules are different. You don't get a tax deduction, and you have to pay taxes before you contribute, but there are no taxes on the earnings at all. Consult with a professional to see which way will yield you the best tax advantages now and in the future.

Cash investments

When you earn interest on a savings account, that counts as investment earnings. On the 1040, though, it is usually listed under "other" income. You must count interest earned through a CD, savings account or interest bearing checking account on your tax form.