Calvin, a client of yours since you opened your practice, has over the past few years become very intrigued with investing in the stock market. He has interest-bearing securities and dividend-paying stocks. He also owns U.S. Securities. He is considering selling $400,000 in stocks. He doesn't know if he should sell additional stock for a loss to help offset the stock sale of $400,000. Calvin called you to ask what tax consequences the interest and dividends will have along with the stock sale. What tax advice would you offer to Calvin in planning for this situation?

Answer:

The interest income from investment is usually treated like ordinary income for federal tax purposes. use tax-shielded accounts. on the other hand, qualified dividends and any value of capital gain realized from sale of securities will be subject to capital gains tax rate as per the applicable rules. it is important to note that a lower capital gain tax rate may be applicable on qualified dividends ( if certain requirements are met). the amount of capital gain realized from sale of capital stock will result in an increased in the value of adjusted gross income, thereby, resulting in higher tax liability for Calvin. Sale of additional capital stock at a loss will lower the taxable income, which in turn, would lower the overall tax liability. 

however, selling additional capital stock at a loss to reduce tax liability is not advised, because, if Calvin continues to hold these investments, he might be able to generate additional dividend income in the coming years. 

If you reinvest dividends, you buy additional shares with the dividend, rather than take the cash. dividend reinvestment can be a good strategy because it's cheap and because reinvestment is automatic, you won't owe any commissions or other brokerage fees when you buy more shares. 

Also, Calvin can look for other tax saving avenues in order to reduce the tax burden if the possible returns from holding the investment exceed the tax benefit.