Special Report

15 Investment Pitfalls and Surprises to Avoid During Tax Season

Source: Public Domain / Wikimedia Commons

11. Taxes on gold, silver and other precious metals

Some investors like to buy precious metals such as gold or silver either as a hedge against inflation or some other financial calamity. Precious metals, however, are taxed differently than traditional investments. The IRS taxes them the same as collectibles, which are considered to be capital assets and are generally taxed at the maximum collectible capital gains rate of 28%. Even those who invested in SPDR Gold Trust, which holds only gold bullion, are treated for tax purposes as if they directly owned the gold. This means, they are likely going to have to pay the 28% rate on gains from the trust, even if they held it longer than a year.

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12. Tax treatment around mergers and acquisitions

Investors who own stock in a company that had agreed to an acquisition or merger deal may have a tax surprise, depending on the terms of the deal. If the deal is all cash or a combination of cash and stock, the investor will get the payment on the date the deal closes and will have to pay taxes on any realized gains.

If the deal closes less than a year after the purchase of the stock, it can create a short-term taxable gain at the nominal tax bracket rather than at the capital gains rate. If the company is acquired with another company’s stock, there is usually no need to pay taxes as no gains have yet been realized, though the IRS would likely need to determine that it is a tax-free transaction.

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13. Not taking the required minimum distribution (RMD) in retirement

Those who reach 70.5 years of age after years of contributing to a retirement plan such as 401(k) or IRA must begin withdrawing from those plans. The IRS calculates a required minimum distribution for each account, and if a person does not take a RMD by the required deadline, the amount not withdrawn is taxed at 50%.

According to the IRS, If you’re over age 70½, you’re required by the IRS to withdraw a certain amount from each of your pre-tax IRAs each year (RMD requirements do not apply to Roth IRAs). If you reached 70½ in 2018, you have until April 1, 2019, to withdraw the RMD amount. Otherwise, you must withdraw it by December 31, 2018. Failure to meet RMD requirements could result in an IRS tax penalty of 50% of the undistributed RMD amount.”

Source: Marc Nozell from Merrimack, New Hampshire, USA / Wikimedia Commons

14. No, the Obamacare investment tax did not go away

When tax laws changed around the time of the Affordable Care Act, or Obamacare, there was a 3.8% net investment income tax (NIIT) that was applied to higher income earners. That threshold was for ordinary income of $200,000 for singles and $250,000 for married people filing jointly. The NIIT was not removed under the Tax Cuts and Jobs Act under Trump. Therefore, if you exceed the applicable threshold amount, you still have to pay an additional 3.8% on the interest, dividend, or gain, and brokerage firms and other investment management firms do not generally take special precautions to prepare you for this.

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15. Don’t worry about taxes and taxes only!

While tax deferral and tax minimization strategies in investing are important, perhaps the biggest lesson for investors is that they should not worry about taxes alone. It is easy to get hung up on all the advantages of tax deferral and tax-free strategies. If the returns are very low, having tax-free or tax-advantaged investments means very little. Sometimes, the best course of action is to lock in a big profit, or even a big loss, without worrying about tax ramifications. Imagine if investors who owned Worldcom, Enron, or the myriad of dot-com stocks that have gone bust in years past held and held these just for some tax implications. They might have lost their whole investment just trying to be as tax efficient as they thought they could be.