Are You Trading Too Much? Check Your Schedule D

Met the April 15 tax-filing deadline? Before you stash your 1040 in a filing cabinet drawer, spend some time with Schedule D to see how many trades you made, especially those that resulted in short-term capital gains. Those gains are subject to ordinary income-tax rates--and, for some folks, that could prove particularly taxing in 2013.

For single individuals with taxable incomes over $400,000 or couples with incomes above $450,000, the maximum federal income-tax rate is 39.6% for the 2013 tax year, up from 35% last year. Meanwhile, the new 3.8% Medicare tax surcharge applies to income--including many types of investment income--that's above $200,000 for individuals and $250,000 for couples. Combine the 39.6% rate with the 3.8% Medicare tax, and some taxpayers might be paying 43.4% on their short-term capital gains, with state income taxes potentially layered on top of that. The bottom line: If you do a bunch of trading in your taxable account, you could pay a lot more in taxes this year.

What to do? First, try to confine your trading to retirement accounts, like your 401(k) plan or Individual Retirement Account, where you don't have to pay taxes until money is withdrawn. Second, assuming it makes investment sense, you might try to hang onto your investment winners in your taxable account for more than 12 months, so they're taxed at the long-term capital-gains rate. You might still have to pay the 3.8% Medicare tax on those long-term gains. But the maximum federal long-term capital-gains rate is just 20%, far less than the top 39.6% income-tax rate.

INVESTMENT AND INSURANCE PRODUCTS: NOT FDIC INSURED • NOT A BANK DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NO BANK GUARANTEE • MAY LOSE VALUE

Citigroup Inc. and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.

Visit irs.gov for more information.

There is no guarantee that these strategies will succeed. The strategies do not necessarily represent the experience of other clients, nor do they indicate future performance. Investment results may vary. The investment strategies presented are not appropriate for every investor.

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