A neat tax savings tip if you’re looking to get out of a shorter term trade is to sell your stock right after receiving a dividend. When you sell a stock for a profit that hasn’t been held for at least one year you owe your standard tax rate based on your income bracket. However, a dividend is taxed at a flat 15% tax rate that is lower than most stock investor’s tax bracket.
Plus Side Number 1:
Usually a stock falls slightly after distributing a dividend. If you sell immediately after the ex dividend date you’ll essentially be converting a portion of your capital gains to dividend earnings. The ex dividend date is the date that if you own the stock on that date you will be receiving a dividend check.
Plus Side Number 2:
Sometimes the stock price just doesn’t fall after a dividend distribution. So for a few more weeks of holding the stock you snagged your self an extra dividend payment without any loss of capital worth. Darn, you earned more money than the extra taxes you had to pay. I just hate it when that happens.
Plus Side Number 3:
Often we want to sell out of a stock just to take our profits and run. While I have absolutely no arguments with that mentality, an upcoming dividend may provide you with enough downside protection in order for you to hold the stock long enough to get your long term capital gains tax savings.
Be careful not too lose all of your profits waiting for tax savings. This is very common amongst long term buy and holders who feel they must wait one year or more no matter what.
This tactic is may be too complicated for the stock market 101 beginner. Keep this tip and other easy learn stock market tips in a journal so you can apply them when you’re ready.
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