Learn about the types of investment taxes on dividends, capital gains, and interest, as well as the Medicare surtax.

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Paying taxes on your investment income

Paying taxes on your investment income
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Investment income may be taxed differently depending on the type of income earned and the account where investments are held, making it important to understand the basic tax considerations that can apply to your portfolio.

  • Investment income may come from dividends, capital gains, or interest, and each type can have different federal tax treatment.

  • Taxes may be owed when investments generate income or when investments are sold for a gain in a taxable account.

  • Tax-advantaged accounts, such as IRAs and 529 plans, generally have different tax rules than taxable brokerage accounts.

  • Some investors may be subject to an additional Medicare surtax on investment income if their income exceeds certain IRS thresholds.

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:

Basic types of IRAs (for retirement)

529 plans (for education)

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:

Dividends

Capital gains

Interest income

IRA

A type of retirement savings account. Two popular types of IRAs are the traditional IRA and Roth IRA. You may contribute to these IRAs only if you (or your spouse) have earned income. The main advantage of a traditional IRA is the opportunity to contribute pre-tax dollars. Roth IRAs are popular because, while contributions consist of after-tax dollars, the earnings on the account are tax-free, and you're not required to distribute the assets during your lifetime. For both IRAs, distributions of untaxed assets (contributions and earnings for a traditional IRA; earnings for a Roth IRA) before age 59½ are generally subject to a 10% penalty tax.

529 savings plan

A state-sponsored investment plan that lets families save for future education costs and withdraw investment earnings federally tax-free when used to pay qualified expenses including qualified higher education expenses, tuition, room and board, and supplies. Families can also use 529 assets for K–12 tuition of up to $10,000 per student per year for enrollment or attendance at a public, private, or religious school.

Earnings

Revenue for a specified period of time, after related costs and expenses have been deducted.

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 Net Investment Income Tax (NIIT)?

The 3.8% Net Investment Income Tax (NIIT), sometimes referred to as the Medicare surtax, may apply to investment income 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 that is used for determining a taxpayer's IRA eligibility; it is generally the taxpayer's adjusted gross income (shown on IRS Form 1040 or 1040A) calculated without any IRA deduction, foreign earned income exclusion, foreign housing exclusion, student loan interest deduction, exclusion of qualified savings bond interest from Form 8815, exclusion of employer-paid adoption expenses from Form 8839, or deduction for qualified tuition and related expenses. Please note that MAGI for IRA conversion purposes will also exclude any current year conversion amounts to determine eligibility. IRS Publication 590 should be used to assist with IRA calculations pertaining to various definitions of MAGI.

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