When do you get taxed on taking funds out of your brokerage account?

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ramblingman1
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When do you get taxed on taking funds out of your brokerage account?

Post by ramblingman1 »

Hello all,

Newbie question. I just opened a brokerage with a lot more money in it to invest instead of keeping it in a CD. This year it has made 25K, mostly in index funds.

Question:

If I take the money out by selling some shares of a fund, when do I pay the taxes? At the moment I take it out, or at tax time, for example in 2022 for the year 2021? I know that if it's under a year, I pay short term at 24% but past a year 15% for long term capital gains.

Say I took out 10K of the 25K I just earned this year for something to buy that I needed, do I get 24% taken out (by my brokerage) of that 10K right when I move it to my checking or do I get the whole 10K, and then have to be prepared to put 24% aside for taxes the following year. I hope that makes sense. Or do I not pay any taxes because the money could be coming out of the original 300k I put in there in the first place, so I would be getting double taxed, right? I don't know how that is all determined.

If anyone has a good link to how this all works or can explain it to me I would be very appreciative!

Thanks in advance!
Last edited by ramblingman1 on Sat Jul 24, 2021 2:35 pm, edited 2 times in total.
Gill
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by Gill »

I assume by “taking out“ you mean selling a holding in your account. There is no withholding in such an account and you are responsible for paying tax on any gain either through withholding, estimated payments or at the time you file your return.
Gill
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ramblingman1
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by ramblingman1 »

Gill wrote: Sat Jul 24, 2021 2:32 pm I assume by “taking out“ you mean selling a holding in your account. There is no withholding in such an account and you are responsible for paying tax on any gain either through withholding, estimated payments or at the time you file your return.
Gill
Yes! Selling some shares of an index fund. So, basically, I should put aside some money to pay my capital gains when I sell shares of something then?

However, I also have 10K of cash in there too that isn't in any holding, just cash on hand. Do I get taxed on that if I take that out as it isn't invested in anything.
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by Gill »

No tax on withdrawal of cash. This isn’t an IRA is it in which case the rules are different?
Gill
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by Lee_WSP »

The taxable event is immediate. The time when you are supposed to forward withholdings is the quarter in which the taxable event occurred. The practical answer is it depends on whether you meet the safe harbor guidelines for quarterly withholdings or not.

The amount of tax also depends.
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by cchrissyy »

if you put money in the account and then take it back out, nothing taxable happened. the reason there could be taxes due is if you invested the money in something while it was in that account and then sold that thing for a profit. the tax is calculated on the gains not the amount you started with and not the amount you withdrew. your brokerage will keep track of this for you and send a form to you and the irs each year so you'll have the right figures on your taxes.
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grabiner
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by grabiner »

You get taxed only on the amount of your capital gain (and dividends paid on the shares), not the total amount sold.

For example, suppose you buy 1000 shares at $20, and the share price goes up to $25. You then sell the shares for $25,000. Since you bought those shares for $20,000, you have a $5000 taxable capital gain; your tax on the gain will be $750 or $1200.

If you have tax software, you can estimate the total tax effect by adding this amount as a capital gain to your tax return, and seeing which numbers change. You might wind up paying additional tax besides the capital-gains tax, because you hit some phase-in or phase-out in the tax code. For example, if your adjusted gross income is over $250K married/$200K single, you pay a 3.8% Net Investment Income tax, so the $5000 gain would lead to $190 in that tax in addition to the $750 or $1200. If you are in the phase-out of the child tax credit, the gain will reduce that credit.
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by howard71 »

If you make a profit selling something (aka, capital gains), then the government demands a cut of it.

You can get away without owing them anything, or at least minimize the taxes due, but you have to know the tax laws. So you should probably become more knowledgeable about capital gains before you do anything. People here are probably offering some good advice but you really need to do your own research so you know exactly what's going on in your own mind.
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ramblingman1
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by ramblingman1 »

grabiner wrote: Sat Jul 24, 2021 4:38 pm You get taxed only on the amount of your capital gain (and dividends paid on the shares), not the total amount sold.

For example, suppose you buy 1000 shares at $20, and the share price goes up to $25. You then sell the shares for $25,000. Since you bought those shares for $20,000, you have a $5000 taxable capital gain; your tax on the gain will be $750 or $1200.

If you have tax software, you can estimate the total tax effect by adding this amount as a capital gain to your tax return, and seeing which numbers change. You might wind up paying additional tax besides the capital-gains tax, because you hit some phase-in or phase-out in the tax code. For example, if your adjusted gross income is over $250K married/$200K single, you pay a 3.8% Net Investment Income tax, so the $5000 gain would lead to $190 in that tax in addition to the $750 or $1200. If you are in the phase-out of the child tax credit, the gain will reduce that credit.
So, my question is... Will I have to make sure that I put money aside for those capital gains, $750 (15% for long-term) or $1200 (24% for short-term) because I will have to pay them to the IRS during the following tax year? I think this is correct. I was hoping that my brokerage would take it out for me instead like they can do when you convert a Roth. But I don't think they would do that since they don't know my tax bracket I guess. This is all new for me because I generally do my Taxes on Turbo Tax, and I have never had to do this part. Usually, I get something from my old TD Ameritrade account, but it only lists the line for dividends and it imports it all for me. I hope that the process for this will be the same or easier. I just need to know how much money to put aside if I take money out. I'm worried I will get hit with a big tax bill if I ever took money out and didn't plan to put some aside for the IRS.
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by ramblingman1 »

Gill wrote: Sat Jul 24, 2021 2:55 pm No tax on withdrawal of cash. This isn’t an IRA is it in which case the rules are different?
Gill
Yes, I have 10K in cash I am not sure what to use it on. This isn't an IRA, but just an individual brokerage account for trading.
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ramblingman1
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by ramblingman1 »

cchrissyy wrote: Sat Jul 24, 2021 3:15 pm if you put money in the account and then take it back out, nothing taxable happened. the reason there could be taxes due is if you invested the money in something while it was in that account and then sold that thing for a profit. the tax is calculated on the gains not the amount you started with and not the amount you withdrew. your brokerage will keep track of this for you and send a form to you and the irs each year so you'll have the right figures on your taxes.
Yes, thanks. So, if I started with say, 10K, and it make another 10K, I would just need to pay long or short-term capital gains on that amount it made, not the initial principal or investment. I just needed to know how to plan to save for paying those taxes for that tax year. In the 10K that I hypothetically made, I would pay 15% or 24%, which I think it will be this year for short-term.
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by cchrissyy »

if your 10k investment doubles in value to 20k and you don't sell it, then as far as the IRS is concerned nothing happened.

the topic of long/short term is measuring the time between when you buy and sell. you are in control of what tax year that happens and whether you want to sell all your shares with gains or just some of them.

in the case that you bought shares at different prices so at today's price each share has a different amount of gains or losses in it, you can choose which specific shares to sell.

you should know at the moment you are selling something how much gains you are locking in. and you can always check your account history. it's not like you will be caught by surprise when the tax paperwork comes.

since you already use turbotax, i suggest making a copy of your file from last year and playing with the numbers to see what happens.
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by Katietsu »

1) I recommend that you choose specific ID so that you can decide what shares to sell. You should be able to go into your account right now and show the tax lots. Each tax lot will have the same gain per share. You should be able to figure what your gain would depending on what you sell. It is all there for you to figure out before you sell any shares.

2) It is not usually a good idea to have them withhold tax on a Roth conversion if you have a taxable account that could be used for the taxes instead. If you are under 59.5 years old, it is a particularly bad idea as you will owe a 10% penalty. If you do additional conversions, please investigate this first.

3) Look up the safe harbor rules relating to underpayment of income taxes. This may help you decide whether estimated taxes or extra withholding is needed to avoid penalties.
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by grabiner »

ramblingman1 wrote: Sat Jul 24, 2021 7:31 pm So, my question is... Will I have to make sure that I put money aside for those capital gains, $750 (15% for long-term) or $1200 (24% for short-term) because I will have to pay them to the IRS during the following tax year? I think this is correct.
Yes. If you are employed, you can file a new W-4 requesting additional withholding; the IRS doesn't care where the withholding comes from as long as it covers your taxes. Alternatively, if you meet the safe harbor rule (90% of the 2021 tax, or 100% or 110% of the 2020 tax, depending on your income), you can just wait until April 15 and pay the tax then. Otherwise, you have to either have additional withholding or pay quarterly estimated tax.
I was hoping that my brokerage would take it out for me instead like they can do when you convert a Roth. But I don't think they would do that since they don't know my tax bracket I guess.
When a brokerage withholds tax on an IRA withdrawal, it withholds at a standard rate, which may not match the tax rate.

And you usually don't want this withheld on a conversion. If you convert a $10K traditional IRA to a Roth IRA, you would like to put the entire $10K into a Roth IRA and pay tax from somewhere else, rather than putting only $8K into the Roth IRA and having $2K withheld. In particular, if you don't make up the $2K that was withheld and you are under 59-1/2, it is treated as an early withdrawal from the traditional IRA and may be subject to 10% penalty. But even if you are over 59-1/2, it is better to pay the tax from another source so that you can put more money into the Roth IRA.
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by nydoc »

You have to pay IRS in the quarter you realized the profit.
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by ramblingman1 »

grabiner wrote: Sat Jul 24, 2021 8:53 pm
ramblingman1 wrote: Sat Jul 24, 2021 7:31 pm So, my question is... Will I have to make sure that I put money aside for those capital gains, $750 (15% for long-term) or $1200 (24% for short-term) because I will have to pay them to the IRS during the following tax year? I think this is correct.
Yes. If you are employed, you can file a new W-4 requesting additional withholding; the IRS doesn't care where the withholding comes from as long as it covers your taxes. Alternatively, if you meet the safe harbor rule (90% of the 2021 tax, or 100% or 110% of the 2020 tax, depending on your income), you can just wait until April 15 and pay the tax then. Otherwise, you have to either have additional withholding or pay quarterly estimated tax.
I was hoping that my brokerage would take it out for me instead like they can do when you convert a Roth. But I don't think they would do that since they don't know my tax bracket I guess.
When a brokerage withholds tax on an IRA withdrawal, it withholds at a standard rate, which may not match the tax rate.

And you usually don't want this withheld on a conversion. If you convert a $10K traditional IRA to a Roth IRA, you would like to put the entire $10K into a Roth IRA and pay tax from somewhere else, rather than putting only $8K into the Roth IRA and having $2K withheld. In particular, if you don't make up the $2K that was withheld and you are under 59-1/2, it is treated as an early withdrawal from the traditional IRA and may be subject to 10% penalty. But even if you are over 59-1/2, it is better to pay the tax from another source so that you can put more money into the Roth IRA.
Oh man, I don't even know how quarterly estimated taxes work or how I would even submit that or what the safe harbor rule is. I'm assuming if I don't withhold enough, then I get penalized for underpayment. I think this usually happens to me with California's taxes. I end up pay a small amount for not withholding enough. I pay to California, but usually get a refund from the federal and therefore in all get a tiny refund. I'd like to learn how to figure out how to just withhold the right amount or close to it, but it's a bit complicated for me since I am not a tax person or CPA, etc... I just try to do it all in Turbo Tax and hope I get it right.

I did just convert a Traditional IRA to a Roth and just didn't withhold anything and expect to pay the taxes next year as I am under 59.5. I don't think I could add more than was already in my Traditional IRA. I just moved it all over based on the advice I got on this forum. So, now I have just one Roth and no Trad. IRA, which hardly had much in it anyway - 1,700 I think from one job a long time ago. I hope it was the right decision to convert that one into my Roth that has over 200K in it.
Last edited by ramblingman1 on Sun Jul 25, 2021 12:50 am, edited 1 time in total.
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by ramblingman1 »

Katietsu wrote: Sat Jul 24, 2021 8:36 pm 1) I recommend that you choose specific ID so that you can decide what shares to sell. You should be able to go into your account right now and show the tax lots. Each tax lot will have the same gain per share. You should be able to figure what your gain would depending on what you sell. It is all there for you to figure out before you sell any shares.

2) It is not usually a good idea to have them withhold tax on a Roth conversion if you have a taxable account that could be used for the taxes instead. If you are under 59.5 years old, it is a particularly bad idea as you will owe a 10% penalty. If you do additional conversions, please investigate this first.

3) Look up the safe harbor rules relating to underpayment of income taxes. This may help you decide whether estimated taxes or extra withholding is needed to avoid penalties.
Some of this is beyond me, but I am trying to learn. I have Schwab so I had never sold anything out of my brokerage yet as I am waiting until next year or trying to save more money for retirement as I have maxed out my Roth. I also have a 403b that I put several thousand it a year (I don't max it out), but am told that I should instead put money into a brokerage where I will have more access to it without penalties if I needed it.
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by backpacker61 »

ramblingman1 wrote: Sun Jul 25, 2021 12:32 am Oh man, I don't even know how quarterly estimated taxes work or how I would even submit that or what the safe harbor rule is. I'm assuming if I don't withhold enough, then I get penalized for underpayment.
You actually don't "file estimated taxes". You just calculate the amount that you estimate you will owe, and there are four quarterly deadlines for submitting the payments.

The form to help with calculating this is called 'IRS Form 1040-ES'.

https://www.irs.gov/pub/irs-pdf/f1040es.pdf

There are four payment "vouchers" in the Form 1040-ES leaflet that you send in with your quarterly estimated tax payments that tell what the deadline is for each quarter. Although I have an account on EFTPS, so I log into that, and schedule the draws on my bank account, so that I don't have to remember to mail paper checks.

https://www.eftps.gov/eftps/

The purpose of figuring estimated taxes is to avoid penalties and interest. If the amount you pay in taxes falls under the safe harbor rule, you can just pay the difference when you file your regular taxes next year, and there won't be any penalties or interest. Or if the capital gain isn't large, the penalty and interest may not be much anyway. But if you find you are owing a lot at tax filing time, you may want to begin figuring estimated taxes for the next year after figuring your regular taxes for the filing in April.
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by Katietsu »

I think you should start learning about these concepts one piece at a time.

It is good that you are asking questions now.

I just looked back at some of your previous posts. I think you should learn more about taxes: taxes on investments, tax savings for retirement plan contributions, likely tax rates during retirement, etc. Alternatively or in the meantime, you could meet with a tax preparer or CPA who could do planning and recommendations.
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by ramblingman1 »

Katietsu wrote: Sun Jul 25, 2021 3:37 pm I think you should start learning about these concepts one piece at a time.

It is good that you are asking questions now.

I just looked back at some of your previous posts. I think you should learn more about taxes: taxes on investments, tax savings for retirement plan contributions, likely tax rates during retirement, etc. Alternatively or in the meantime, you could meet with a tax preparer or CPA who could do planning and recommendations.
Yes, I'm learning. Thanks. Great to have a forum here where there are helpful people who can help give guidance.
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by ramblingman1 »

backpacker61 wrote: Sun Jul 25, 2021 6:20 am
ramblingman1 wrote: Sun Jul 25, 2021 12:32 am Oh man, I don't even know how quarterly estimated taxes work or how I would even submit that or what the safe harbor rule is. I'm assuming if I don't withhold enough, then I get penalized for underpayment.
You actually don't "file estimated taxes". You just calculate the amount that you estimate you will owe, and there are four quarterly deadlines for submitting the payments.

The form to help with calculating this is called 'IRS Form 1040-ES'.

https://www.irs.gov/pub/irs-pdf/f1040es.pdf

There are four payment "vouchers" in the Form 1040-ES leaflet that you send in with your quarterly estimated tax payments that tell what the deadline is for each quarter. Although I have an account on EFTPS, so I log into that, and schedule the draws on my bank account, so that I don't have to remember to mail paper checks.

https://www.eftps.gov/eftps/

The purpose of figuring estimated taxes is to avoid penalties and interest. If the amount you pay in taxes falls under the safe harbor rule, you can just pay the difference when you file your regular taxes next year, and there won't be any penalties or interest. Or if the capital gain isn't large, the penalty and interest may not be much anyway. But if you find you are owing a lot at tax filing time, you may want to begin figuring estimated taxes for the next year after figuring your regular taxes for the filing in April.
My guess is that if I did take money out, I would put some aside to pay the capital gains, depending on the long-term or short-term. I'll have to see but I would never know until I took the money out and how much I took out. I wish there were a way for the brokerage to ask how much you want to set aside for capital gains and they do it for you so your done with it right away but I could be wrong that that would be the best way to handle it. I'd just rather it come off the top than deal with it at tax time, but if it's all done via the upload of the 1099 then maybe it will be okay if the penalties aren't too high. I'm not rich or tax savvy by any means so I'm on my own to learn little by little.
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by Fat Tails »

In general, you must pay taxes in 2 situations in your brokerage account:
1. When you sell a security (stock or bond or mutual fund) for more than you paid for it - this is a capital gain.
2. When a security you hold provides you (or your account) income during the year - this is dividends or interest.

The sum of these will go on schedule D (or equivalent) on your tax return when you file your taxes.

Simply putting money into the account or taking it out of the account is a non-taxable event.
Simply because a stock you own goes up in value isnt a taxable event (until you sell it).

Hope this helps.
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by ramblingman1 »

Fat Tails wrote: Mon Jul 26, 2021 12:55 am In general, you must pay taxes in 2 situations in your brokerage account:
1. When you sell a security (stock or bond or mutual fund) for more than you paid for it - this is a capital gain.
2. When a security you hold provides you (or your account) income during the year - this is dividends or interest.

The sum of these will go on schedule D (or equivalent) on your tax return when you file your taxes.

Simply putting money into the account or taking it out of the account is a non-taxable event.
Simply because a stock you own goes up in value isnt a taxable event (until you sell it).

Hope this helps.
Yes, I generally understood this. My question was more specific to what to do once I sell a stock/mutual fund, etc... If I sold 10K, then I get that 10K, but I will somehow have to pay the IRS later for either short or long-term capital gains. I have surmised that this is all reflected on the 1099 and that I will have to pay the IRS the capital gains either at tax time or before somehow as some have explained. It got more complicated for me when people started talking about the safe harbor rule and filing the form 1040ES and paying quarterly vs how I am used to paying - in March or April! I am trying to keep it simple or learn slowly. Thanks for the feedback!
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by backpacker61 »

ramblingman1 wrote: Mon Jul 26, 2021 1:20 am It got more complicated for me when people started talking about the safe harbor rule and filing the form 1040ES and paying quarterly vs how I am used to paying - in March or April! I am trying to keep it simple or learn slowly. Thanks for the feedback!
You don't "file Form 1040-ES". It's just a tool you can use to help you estimate your tax liability for a year. What you do submit to the IRS are the four payment vouchers included in the Form 1040-ES leaflet at the end of each quarter (if you pay estimated tax by paper check).

Capital gains on the sale of a stock will be reported to you by the brokerage on the 1099 form they send you. You will have to report the capital gain on Schedule D (and also Form 8949; the Schedule D will instruct you to do this). Capital gains distributions from mutual funds will also need be reported on Schedule D. The dividends and interest you receive in your brokerage account will also be reported on the Form 1099, and those you report on Schedule B.

Here is the "Safe Harbor Rule":

General Rule
In most cases, you must pay estimated tax for 2021 if both of the following apply.
1. You expect to owe at least $1,000 in tax for 2021, after subtracting your withholding and refundable credits.
2. You expect your withholding and refundable credits to be less than the smaller of:
a. 90% of the tax to be shown on your 2021 tax return,
or
b. 100% of the tax shown on your 2020 tax return.
Your 2020 tax return must cover all 12 months.

Special Rules
There are special rules for farmers, fishermen, certain household employers, and certain higher income taxpayers.
Farmers and fishermen.
If at least two-thirds of your gross income for 2020 or 2021 is from farming or fishing, substitute 662/3% for 90% in (2a) under General Rule.
Household employers.
When estimating the tax on your 2021 tax return, include your household employment taxes if either of the following applies.
• You will have federal income tax withheld from wages, pensions, annuities, gambling winnings, or other income.
• You would be required to make estimated tax payments to avoid a penalty even if you didn’t include household
employment taxes when figuring your estimated tax.
Higher income taxpayers.
If your adjusted gross income (AGI) for 2020 was more than $150,000 ($75,000 if your filing status for 2021 is married filing separately),
substitute 110% for 100% in (2b) under General Rule, earlier. This rule doesn’t apply to farmers or fishermen
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by grabiner »

Fat Tails wrote: Mon Jul 26, 2021 12:55 am In general, you must pay taxes in 2 situations in your brokerage account:
1. When you sell a security (stock or bond or mutual fund) for more than you paid for it - this is a capital gain.
2. When a security you hold provides you (or your account) income during the year - this is dividends or interest.

The sum of these will go on schedule D (or equivalent) on your tax return when you file your taxes.
Dividends and interest go on Schedule B.

If you hold a mutual fund and it sells a security for a capital gain, that will be distributed to you separately. If the gain is long-term, it will be reported on Schedule D along with other capital gains. (Short-term gains distributed by mutual funds are taxed as non-qualified dividends and go on Schedule B.) Since you hold index funds, you probably won't have too much of these gains.

All of these sources of income will be reported on the Form 1099 you receive from the brokerage.

(edited to fix typo)
Last edited by grabiner on Tue Aug 10, 2021 11:41 pm, edited 1 time in total.
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by MahoningValley »

The only thing I have to add is to enroll into EFTPS.gov. It's a painless way to drop of few bucks to the government every now and then. If you send too much, you get it back at tax time.
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by Katietsu »

Here might be a starting point:

1) Try to understand specific ID, tax lots, calculating the gain if you sell.

2) Reconsider using a taxable brokerage account instead of your workplace retirement account. You could do a post just on this topic.

3) Look at the safe harbor rules that talk about how you can avoid penalties by making sure your 2021 withholding is 100% or 110% of your 2020 tax liability (depending on the AGI.). This might work for you. Also, underpayment penalties are based on prevailing interest rates, so they are pretty low right now. So if you make ss by a bit, not a big deal.
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Re: When do you get taxed on taking funds out of your brokerage account?

Post by retired@50 »

ramblingman1 wrote: Sun Jul 25, 2021 12:32 am Oh man, I don't even know how quarterly estimated taxes work or how I would even submit that or what the safe harbor rule is. I'm assuming if I don't withhold enough, then I get penalized for underpayment. I think this usually happens to me with California's taxes. I end up pay a small amount for not withholding enough. I pay to California, but usually get a refund from the federal and therefore in all get a tiny refund. I'd like to learn how to figure out how to just withhold the right amount or close to it, but it's a bit complicated for me since I am not a tax person or CPA, etc... I just try to do it all in Turbo Tax and hope I get it right.
If you have a W-2 job with a regular paycheck, you can just talk to someone in your payroll department and tell them you need to withhold an extra amount for the state of CA each pay period. I ran into this issue when I was working, and by adding $10 per paycheck to state withholding, I was covered by year end.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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