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Which tax treatment do I choose for my after-tax accounts?
Which tax treatment do I choose for my after-tax accounts?

This article discusses how to choose ordinary income or capital gains tax treatment for your accounts.

Nancy Gates avatar
Written by Nancy Gates
Updated over a week ago

Accurately Accounting for After-tax Accounts

Are you wondering how to accurately represent the taxation of your after tax accounts?

Cash and Bonds

If you have a checking or savings account, or a brokerage account holding bonds, select Ordinary Income.

Stock

If you have a brokerage account holding stock, select Capital Gains.

Mixed Accounts

If you have a brokerage account holding a combination of stock and bonds, you may want to separate the securities into two accounts to accurately account for the different taxation of each security.

When you enter an account that holds stock, you'll need to enter a cost basis

Your cost basis is the original investment amount for tax purposes. This is usually the purchase price, adjusted for stock splits, dividends, and return of capital distributions.

When you enter an account that holds stock, you'll also need to enter the turnover rate

Capital gains are not taxed until they are realized, and this isn’t an issue in your retirement accounts (they have zero cost basis.) Gains in after-tax accounts are taxed at preferential or lower capital gains rates and not ordinary income rates. The brackets are 0%, 15% and 20% and depend on your taxable income. You may incur capital gains taxes in a taxable account, when you 1) sell shares, and when 2) there is internal buying and selling in the account.

You’ll use the turnover rate to represent any internal buying and selling within the account. The tool will take the account balance and cost basis, realize that percentage of gains, and tax them at your Long Term Capital Gains rate. If you are a passive investor, holding ETFs or index funds, the turnover rate will be low or negligible. If you have a managed portfolio, managed fund, or trade frequently the turnover rate will be higher, maybe 20% or more. See below if you need guidance in determining your turnover rate.

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