Everything You Need to Know About Taxes on Investment Income
Taxes on investment income can be confusing, especially since there are several ways investment income is taxed. An investor may be familiar with capital gains taxes—the taxes imposed when one sells an asset that has grown—but less clear on the implications of dividends, interest, and other ways in which investments have tax implications.
Types of Investment Income Tax
– Dividend – Capital Gain – Interest Income – Interest income – Net Investment Income Tax (NIIT)
Dividends are distributions that are sometimes paid to investors who hold a stock or otherwise have an interest in a partnership, trust, S-corp, or other entity taxable as a corporation. Dividends are generally paid in cash, out of profits and earnings from a corporation.
Tax on Dividends
Capital gains are the profit an investor makes between the price of an asset when purchased, versus the price of an asset when sold. Capital gains taxes are the taxes levied on the net gain between purchase price and sell price.
More About Capital Gains Tax
Taxable Interest Income
Interest income on investments are taxable at an investor’s ordinary income level. This may be money generated as interest in brokerage accounts, or interest from assets such as bonds or mutual funds.
The Net Investment Income Tax (NIIT), now more commonly known as the “Medicare tax,” is a 3.8% flat tax rate on investment income for taxpayers whose adjusted gross income (AGI) is above a certain level—$200,000 for single filers; $250,000 for filers filing jointly.
Net Investment Income Tax (NIIT)
One way to mitigate the effects of investment income is to create a set of tax-efficient investing strategies. These are strategies that can minimize the tax hit that you may experience from investments and allow you to grow your wealth.
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