Making The Choice to Do Financial Planning

If you recently added investments to your financial portfolio, you're likely wondering how they will affect your income tax obligation. The biggest reporting change you will generally see is the addition of two new forms: Form 8949 and Schedule D. What are these? What do they mean for you? And how can you minimize tax due from these earnings? Here's what you need to know.

What Is Form 8949?

Form 8949 is the means by which a taxpayer reports the sales of various taxable investments during the year. The majority of these sales are reported to the taxpayer by the brokerage company that handles their financial investments, such as stocks and bonds. However, if you had an investment not handled by a brokerage — such as real estate sales or collectibles — you may need to report your own information on Form 8949. 

This form is divided into two sections: short-term investments and long-term investments. This distinction is determined by whether you held the investment for one year or less (short-term) or more than one year (long-term). Most taxpayers report the dates of purchase and sale as well as the basis and sale price of each investment. 

Finally, indicate through check boxes whether or not the basis of each investment was reported to the IRS as well as whether or not you received Form 1099-B for it. 

What Is Schedule D?

Once you complete Form 8949, transfer the totals of each section to Schedule D for inclusion with your income tax form. Schedule D is also broken into two parts: short-term and long-term investment sales. For each category, report the total basis and proceeds. 

The information on Schedule D represents your total taxable long-term capital gain or loss and your total taxable short-term capital gain or loss. Capital gains are taxed at different rates based on your overall tax rate. You may also use losses to offset gains and therefore reduce taxes. 

How Can You Minimize Taxes?

Taxable investments do have the potential to increase your taxes by increasing income. How can you minimize this downside? 

First, learn how to track and report the maximum appropriate basis, or cost, so as to reduce profit margin. Second, create a strategy using the differences in tax rates for short-term investments and long-term investments. Finally, be certain to complete these forms correctly to avoid costly mistakes. 

Where Should You Start?

Certainly, Form 8949 and Schedule D can be complicated for new investors. Start by learning more about them and getting the assistance of a qualified tax preparation service in your state. With their guidance, you'll keep taxes to a minimum and enjoy more profits from your new investments.