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Investment Income

By
Lia Kopin-Green
/
April 17, 2023

What is Investment Income?

Investment income refers to the money earned from certain investments such as stocks, bonds, mutual funds or other financial assets. This type of income may take the form of dividends, interest, capital gains or rental income.

In the United States, investment income is subject to federal income taxes. The exact amount of tax levied on investment income depends on a number of important factors such as the type of investment and the taxpayer's income tax bracket.

Key Takeaways

  • Investment income is the money earned from investments such as stocks, bonds, mutual funds, real estate or other financial assets.
  • Federal income taxes apply to investment income.
  • The interest earned on a savings account is also considered investment income.

Types of Investment Income

There are many different types of investment income. Below, we will take a closer look at some of the most common types.

  • Dividend Income: Dividend income is the distribution of a portion of a company’s earnings to its shareholders. In most cases, dividends are paid in cash or in additional shares of stock on a quarterly basis. Dividends are often earned from stocks, mutual funds and exchange-traded funds (ETFs). While some dividends labeled as “qualified” are taxed at a lower capital gains rate, typical dividends are subject to the regular income tax rate.
  • Interest Income: Interest income is generally earned from investments in fixed income securities such as bonds, certificates of deposit (CDs), money market instruments and savings accounts. Fixed income securities are often considered a smart choice for investment as they have a fixed rate of return that is known at the time of investment. Nonetheless, they typically offer lower returns than stocks.
  • Capital Gains: Capital gains refers to the profits earned from selling an investment for more than what was initially paid for it. Assets held for less than one year are considered short-term gains and are therefore taxed at ordinary income tax rates. On the other hand, long-term gains for assets held more than one year and taxed at lower rates.
  • Rental Income: Rental income is money earned from investing in real estate properties such as rental homes, apartments, or commercial buildings. In general, rental income can provide a steady stream of passive income for investors. It is typically taxed at standard income tax rates. However, property owners may choose to take advantage of tax deductions through expenses such as property taxes, mortgage interest and maintenance costs.

Bottom Line

Investment income can offer investors a dependable income stream, but it is crucial to bear in mind that the taxation of various types of investment income can vary. It's important to understand these distinctions to make informed investment choices and to ensure compliance with tax laws and regulations. Therefore, it is strongly advised to seek the counsel of a tax attorney before making any serious decisions. For personalized tax guidance, connect with one of Attorney At Law’s top-tier tax attorneys today.

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