Taxes on Investment Income

Chris Bibey
by Chris Bibey

When it comes to tax and investment income there are probably a lot of questions on your mind. If you are smart, you are going to invest money for the future. While this is a great idea, you need to know how your investment income will be taxed. The taxation of this income depends on many factors, including the type of investment as well as what you are doing with the money.

Take municipal bonds for example. The interest that they earn is exempt from federal taxation. Along with this, they are also exempt from state tax in the state they were issued. That being said, the interest may be subject to income tax in your state, if different from the issuing state.

What about capital gains tax? This sort of tax on investment income is very common. Unfortunately, many people do not know enough about this tax or how it is calculated. Above all else, you should know that capital gains tax is determined by the type of investment as well as the length of time it was held.

To go along with federal capital gains tax, your gains are also subject to tax on the state level. The majority of states do not have a separate tax for capital gains. Instead, they tax these gains at the ordinary income tax rate.

Do you know the difference between long-term capital gains and short -term capital gains? If not, you should learn as much as you can before you decide to sell stocks, bonds, real estate, etc.

Short-term capital gains are considered to be investments held for one year or less. In this case, ordinary tax rates of up to 35 percent apply. As you can see, buying and selling for a profit after less than one year can result in a hefty investment tax.

Long-term capital gains are treated differently, and considered to be those that are held for a period of more than one year. Starting in 2008, taxpayers in the 10 and 15 percent tax brackets are taxed at zero percent. Those in the 25, 28, 33, and 35 percent brackets are taxed at 15 percent.

There is a lot to think about when it comes to taxes and investment income. Since it is easy to become confused, double check all your investments with a tax professional before moving forward or selling anything. This will help to ensure that the tax and investment portions of your financial plan do not become overbearing.