Paying taxes on your investment income
Points to know
- There are several types of investment income—dividends, capital gains, and interest.
- Some investors are also subject to an additional tax based on income.
Types of investment taxes
It's a lesson you probably learned early in your working life: When you make money, you usually owe taxes.
This is also true of money you make on your investments. Some taxes are due only when you sell investments at a profit, while other taxes are due when your investments pay you a distribution.
One of the benefits of retirement and college accounts—like IRAs and 529 accounts — is that the tax treatment of the money you earn is a little different. In many cases, you won't owe taxes on earnings until you take the money out of the account—or, depending on the type of account, ever.
See the tax treatment of:
But for general investing accounts, taxes are due at the time you earn the money. The tax rate you pay on your investment income depends on how you earn the money.
Learn about the taxation of:
IRA (individual retirement account)
A type of account created by the IRS that offers tax benefits when you use it to save for retirement.
529 savings plan
A type of investment account that offers federal and state tax benefits to people saving for higher education. These plans are sponsored by particular states but are usually open to anyone. The money in a 529 savings plan can be used for tuition and other qualified expenses at thousands of colleges, universities, graduate schools, and trade and technical schools in the United States and abroad.
The investment returns you accumulate on the savings in your account.
GOOD TO KNOW
The tax information presented here only applies to federal taxation. Individual states may have their own taxes on investment earnings. Talk to a tax advisor about your specific situation.
What about the Medicare surtax?
Investment income may also be subject to an additional 3.8% tax if you're above a certain income threshold.
In general, if your modified adjusted gross income is more than $200,000 (single filers) or $250,000 (married filing jointly), you may owe the tax. (These limits aren't currently indexed for inflation.)
Modified adjusted gross income (MAGI)
An amount used to determine a taxpayer's IRA eligibility. Generally, it's the taxpayer's adjusted gross income calculated without certain deductions and exclusions.
*If your qualified dividend income pushes you into the 25% tax bracket, only the amount of dividends that exceeds the 15% bracket will be subject to taxes.