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Stocks 201: Stocks and Taxes

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1.
If you should have both large capital gains and large capital losses, what would be the most effective way to reduce taxes on the gains?
Choose wisely. There is only one correct answer.
Realize both the gain and the loss in the same year. If you did this, the losses would offset the gains. If you did either of the other two approaches, you would either be stuck with a tax bill or you might have to stretch out your losses over many years.
2.
Which type of tax-advantaged account offers the potential for tax-exempt distributions?
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A Roth IRA. A Roth IRA offers tax-free distributions, as long as certain rules are met. The downside is that Roth IRAs must be funded with after-tax dollars.
3.
What does "stepped-up basis" mean?
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An investment's basis changes to that of the market value on the day of your death. Stepped-up basis is most commonly known in estate planning, where if you die, the basis will step up to that of the day of your death. Whoever inherits the stock will thus enjoy less tax on it.
4.
All other things being equal, which would you rather own in a taxable account?
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The stock of a solid business that grows steadily over time but pays no dividend. You would prefer to own in a taxable account the stock in a solid business that grows steadily over time, but pays no dividend. This would allow you to hold the stock for a long time, deferring the realization of capital gains. Dividends would be taxable.
5.
If you have a capital loss of $4,000 in one year and you deduct the limit of $3,000 on your income tax return, what happens to the leftover $1,000?
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You carry it over to the next year. The IRS lets you carry over any undeducted loss into subsequent years.