Investment Income Tax Rates

Most people donโ€™t like paying taxes. Ask the majority of US taxpayers if they would rather pay capital gains or ordinary income tax and their response will likely be โ€œneitherโ€. You may have a variety of securities in your portfolio such as stocks, bonds, mutual funds, real estate investment trusts (REITs), master limited partnerships (MLPs), annuities or cryptocurrencies. All of these investments may be subject to taxation, but how do you determine if the capital gains tax rate or your personal income tax rate applies to them? Itโ€™s important to understand the basic differences between ordinary income taxes and capital gains taxes because the amount of taxes you pay can have a significant impact on you should construct your portfolios as you prepare for and enter into retirement. .


Income Tax

Income tax is a tax imposed by the US government on businesses or individuals calculated based on the amount and types of income they receive in a calendar year. You likely pay income tax on different ordinary income streams such as salary, collected rent, pension income and required minimum distributions (RMDs). The US uses a progressive income tax system where those who earn more are taxed at higher effective rates and those who earn less are taxed at lower effective rates. Depending on your unique circumstances, you or your business may be able to claim special exemptions or deductions, lessening your personal income taxes


Capital Gains Tax

Capital gains tax is a tax you pay when you sell taxable investments for a profit. You may incur different capital gains rates depending on how long you held the asset. Short-term (less than one year) capital gains taxes are the same as your personal income tax rate, while long-term (over one year) gains are often taxed at a lower capital gains rate, depending on your overall income.

You incur capital gains taxes when you sell an investment for a profit, but what happens if you sell an investment for a loss? You may consider tax-loss harvesting in taxable accounts. Tax-loss harvesting refers to selling securities at a loss to realize and offset gains you may have realized that year. Realized losses can also be carried forward to offset realized gains in subsequent years. However, you should always consult a tax advisor to get advice specific to your situation.

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Different Investments, Different Tax Rates

For some investments, the line between what qualifies as capital gains or income can get blurry. Do you know if your investment income and proceeds will be taxed as long-term capital gains rates or ordinary income tax rates? Below, we provide answers to a few common tax questions. However, the securities we describe are subject to complex state and federal (IRS) tax rules. We encourage you to talk to your tax advisor to understand how tax laws will affect your specific investments, capital gains tax rate or any deduction, exemption or taxable-event variations that may apply depending on your unique situation.

  • How are you taxed when you sell a stock?

    Long-term capital gains rates generally apply if you sell a stock at a profit after holding it for a year or more in a taxable account. If you sell a stock at a gain and have owned it for less than a year, your profits are subject to your ordinary income tax rate.1 However, these taxes do not apply to transactions within retirement accounts like Roth IRAs and Traditional IRAs.

  • How are dividends taxed?

    Qualified dividends—the most common dividend paid to investors by US corporations—are taxed at a dividend rate that varies based on your tax bracket. Non-qualified or ordinary dividends may be taxed as ordinary income.2

  • How is annuity income taxed?

    Annuities can be complicated. It depends on whether you bought your annuity with pre-tax or after-tax money, what kind of annuity you hold (there are a few variations) and when you are taking withdrawals. A comprehensive answer to this topic exceeds the scope of this article, so it may be best to consult your tax advisor to get clear answers on these complicated insurance products.

  • How are REITs taxed?

    One of the most common indirect real estate investment vehicles is a real estate investment trust (REIT). REITs pool investor capital to purchase income-producing residential or commercial property. REITs aren’t taxed at the corporate level, and they generally must pay a certain percentage of their profits out to investors each year. Because of this setup, REIT investors typically pay taxes on income distributions at their ordinary individual tax rates.3

  • How are other non-traditional assets taxed?

    Non-traditional investments like Master Limited Patnerships, precious metals and cryptocurrency all harbor tax complexities that may be specific to your situation. If you hold any of these investments in your taxable portfolio, you should speak with your tax advisor on how they affect your tax picture.


Fisher Investments Can Help

Understanding the tax treatment of your investments can play a major role in building a retirement portfolio that aligns with your longer-term financial goals. Fisher Investments may be able to review your portfolio and recommend an asset allocation that we think is best for you, while taking into consideration your tax situation.

To learn more about how we can help, call and speak with one of our qualified representatives today.


1Source: Internal Revenue Service (IRS), https://www.irs.gov/taxtopics/tc409.

2Source: Internal Revenue Service (IRS), https://www.irs.gov/taxtopics/tc404.

3Source: Internal Revenue Service (IRS), www.irs.gov/instructions/i1120rei.

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