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Colin OShea

January 09 , 2017

Investment Basics: Investment Income and Taxes

Investment Income and Taxes

It’s great to earn money on your investments. Uncle Sam thinks so, too. How much of your investment income will be taxed generally depends on the type of investment.

 

Here’s a brief look at the tax treatment of some common income-producing investments.

 

Dividend-paying Stocks

 

Companies pay dividends to shareholders out of the company’s earnings and profits. The tax treatment for “qualified” dividends is based on the stockholder’s income-tax bracket, as follows:

 

0% for individuals in the 10% and 15% tax brackets

 

15% for individuals in tax brackets above 15% but below 39.6%

 

20% for individuals in the 39.6% tax bracket* 

 

Typically, the same tax treatment applies to qualified dividends of both common and preferred shares.

 

Bonds

 

Different types of bonds may have different types of tax exposure.

 

Corporate bonds — interest is subject to federal and state income tax at your ordinary income-tax rate.*

 

Treasury bills — the difference between what you pay for a Treasury bill and the amount you receive at maturity is interest that is subject to federal — but not state and local — income tax.*

 

Treasury Inflation-Protected Securities (TIPS) — interest payments and increases in the principal are subject to federal — but not state and local — income tax.*

 

Municipal bonds — interest generally is exempt from federal — and possibly state and local — income tax.

 

* A 3.8% Medicare surcharge on investment income may apply to higher income taxpayers. 

If you have any questions on the tax treatment of some common income-producing investments, contact a Security National Bank financial professional. Click below to contact us today. 

 

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