Investment income taxes
Capital gains, dividends, and interest income
Most investment income is taxable. But your exact tax rate will depend on several factors, including your tax bracket, the type of investment, and (with capital assets, like stocks or property) how long you own them before selling.
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If you sell an asset for more than you paid for it, your profit (minus your cost basis) is called a capital gain.
Short-term capital gains are profits from selling assets you own for a year or less. They’re usually taxed at ordinary income tax rates (10%, 12%, 22%, 24%, 32%, 35%, or 37%).
Long-term capital gains are profits from selling assets you own for more than a year. They’re usually taxed at lower long-term capital gains tax rates (0%, 15%, or 20%).
Tooltip can be ordinary or qualified, and each are taxed at different rates.
Ordinary dividends are taxed at ordinary income tax rates. They’re usually reported in box 1 of the Tooltip you get from your bank or brokerage, or on a K-1.
Qualified dividends are taxed at lower capital gains tax rates. If you receive them, they should appear in box 1b of your 1099-DIV.
Most types of interest income are taxed at ordinary income tax rates.
Interest income that may be exempt from federal tax, includes:
- Municipal bond interest
- Private activity bonds
- Exempt-interest dividends (for example, from a mutual fund that invests in municipal bonds)
Interest incomes is usually shown on the Tooltip you get from your bank or brokerage, or on a K-1.
Here are the MAGI thresholds for net investment income tax:
|Filing status||MAGI threshold|
|Married filing jointly||$250,000|
|Married filing separately||$125,000|
If you owe this tax, it will apply only to your total net investment income or the portion of your MAGI that goes over the threshold—whichever is less.
Here’s an example:
Say you invest $10,000 (including commissions and fees) in a stock that pays $200 in taxable dividends, and you automatically reinvest your dividends. This gives you an original cost basis of $10,000—and an adjusted cost basis of $10,200.
If you sell your stock, using the higher (adjusted) cost basis on your taxes will reduce your capital gain by an additional $200 and cause you to owe less tax. If you lose money on your stock sale (have a capital loss), you’ll still want to use the higher cost basis because the IRS will add it to your loss, which may further reduce your taxable income.
As an investor, business owner, or high earner, you may be more likely to owe additional taxes on top of ordinary income and capital gains taxes. Here are three additional taxes you should know about:
Additional taxes you might owe
|Alternative minimum tax (AMT)||Unrelated business taxable income (UBTI)||Foreign taxes|
AMT is an alternate tax calculation with different rules than regular tax. It’s designed to make sure all taxpayers pay at least the minimum amount of tax.
For 2019, you won’t owe AMT if your income is equal to or less than $71,700 (single filers), $111,700 (married filing jointly), and $55,850 (married filing separately).
Situations that can trigger AMT include having a high household income, realizing a large capital gain, or exercising stock options.
If you own a tax-exempt entity that gets part of its income from activities that aren’t directly related to the organization’s main purpose, you may owe UBTI tax. Investments in a retirement account that earn UBTI can also trigger this tax.
The tax applies only to the portion of income from Tooltip . Income from interest, dividends, and capital gains are not usually included in UBTI.
For more information, visit www.IRS.gov.
Dividends, interest, and capital gains from international investments may be taxed by the foreign country, as well as by the U.S.
That’s double taxation. But in most cases, you can put some or all of the Tooltip you paid back into your pocket by taking the foreign tax credit or claiming the foreign taxes as an itemized deduction.
To determine if you paid foreign taxes, check your related K-1, 1099-DIV, 1099-INT, or 1099-B.