Taxes
Overview#
One thing that people misunderstand a lot of time is that the U.S. has a marginal tax rate system. This means as you move up tax brackets, only the money in the higher bracket is taxed at that rate.
So what?
Really what you care about at the end of the day is: How can I maximize the amount of money that I have?
If I have an investment that makes 10% and I have to give 1% of that to the government (netting me 9%), that is better than an investment that nets me 8% that I have to give 0% of that to the government. The most common asset that people consider is Real Estate, so I'll delve more into the tax aspects of that, over there.
Additionally, you should never worry about "How much do I owe?"
The math behind this is super simple:
- How much does the government think I owe?
- How much as been withheld?
At the end of the year, if 1 > 2 you have to pay. If 2 < 1, then you get money returned to you.
Don't overthink it. Your only real lever is #1, in which case, outright fraud is your best option. I kid. Al Capone tried that and he died of syphilis after an extended stay in Alcatraz. So, instead, focus on doing the best you can and let taxes work themselves out. Be cognizant of them, but don't let they drive your investment decisions.
Restricted Stock Units (RSUs) & Taxes#
This may or may not be useful to you. You probably already know all this, but just in case, Happy Tax day.
tip
For the record, I had to amend 4 years of taxes to fix the fact that I messed this up. It's not theoretical (OK, it is), but it's 100% something you need to understand, because it's practical too.
When you sell stock (including ESPP) or RSUs you will get a form (I think it’s a 1099-R) that will give your sale price and your gain.
BUT it doesn’t show any taxes you might have paid on the acquisition, so that your cost basis is actually higher and thus your tax gain and liability is less.
Note#
Ok so I wrote this a while ago, and then I read it, and I realized it's 100% true, but not necessarily helpful. So, let me try to fix that.
- You sell 10 RSUs for $10. 10 * 10 = $100 in total sale. If your "cost basis" (the amount that it cost you to get that) is $0, the $100 is gain, and probably, short term, which means you pay your standard tax rate. That'll be a big number, and sometimes your brokerage says your cost basis was $0.
- But, when you do that sale you immediately recognize income on it (because the company forces you to) and on your pay stub will say something like "$110" in W2 income, which is now your cost basis. Now, instead of having a gain of $100 ($100 - $0) , you have a "loss" of $10 ($100 - $110), and your taxes will be dramatically changed.
- So, you can go from a paper gain of a large number ($100) to a small paper loss ( -$10 ) which could make a several hundred/thousand dollar change in your out of pocket, so pay attention.
- I include this calculation in the "Taxes" tab of the Introduction to Investing Calculations spreadsheet.