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.
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.
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.
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