Investment Income Tax Rates

Most people don’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 “neither”. 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? It’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.