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I know opening the account will not impact me for this tax season, but next year since I opened the brokerage account taxes will be a little different.

What do I need to keep track of while I'm investing for taxes next year? Also, What should I do to mitigate the taxes I pay on any dividends/interest I earn?

Thanks!

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There are a few things to keep track of:

  • Capital Gains: You will have to pay capital gains taxes on the proceeds of a sale of stocks, ETFs or mutual funds. Vanguard will report your gains to you in a 1099 form next February, but it is probably a good idea to keep electronic copies of your trade confirmations.
  • Capital Gains: Mutual funds will usually pay a capital gains distribution at the end of the year as a result of trading activity within the fund. Vanguard will report this on your 1099 form.
  • Dividends: These are taxable. Vanguard will report this on your 1099 form.

You can mitigate tax liability in a regular brokerage account in a few ways:

  • Hold your shares for over 18 months so that you pay the lower long-term capital gain rate.
  • Buy index funds or other "tax efficient" mutual funds.
  • Buy ETFs or stocks versus mutual funds. (These funds typically don't have capital gains distributions.)
  • Buy tax exempt US Government bonds. (Do your homework! Some Federal Agency bonds are NOT tax exempt. A big example is GNMA bonds.)
  • Buy tax exempt municipal bond funds, preferably for the state that you live in to avoid Federal and State income tax.

Brokerages these days will track your cost basis for you, which saves you alot of work at tax time. That said, you should hold on to your statements and trade confirmations in electronic form, just in case you transfer your account to another broker, or have some other problem.

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