Investment income is income that comes from interest payments, dividends, capital gains collected on the sale of a security or other asset, and any other profit that is made through an investment vehicle of any kind.
For the most part, unless you are very wealthy, your income is earned income. There are instances where you may have some money in a time deposit, and earn interest on it. There are other times that you have some mutual funds, stocks, or bonds, and receive dividends or capital gains distributions. In addition, you may sell some securities and/or collectables and have either an ordinary or capital gain. You may have rental income, or be a passive investor in a partnership, or other investment vehicle. It is important to point out that a majority of the time investment income is either passive income or portfolio income.
The Internal Revenue Service deems portfolio income as income derived from investments and includes
1. Capital Gains
Various types of portfolio income are taxed differently. Generally for some income tax levels, investments held for more than one year and one year and one day are taxed at the capital gains rate of 20%. Investments that are held for less than one year and one day, dividends and interest are taxed at your ordinary income tax rate.
The taxation of the sale of securities is pretty straightforward. You bought the security for something (basis) and you sold the security for something. The difference of the sale of the security and the basis is your realized gain or loss. Gains and losses are not recognized (taxed) until they are realized (money has changed hands). Simple right? If the security you sold has been held for more than a year and a day, you pay capital gains on the gain. If the security you sold has been held for less than a year and a day, you pay ordinary income tax on the gain. Once you add all of your short term (securities held for less than a year and a day) gains or losses, and your long term (securities held for more than a year and a day) gains or losses, you report them to the IRS. If you have more gains than you do losses, then you pay the respective tax on the gain. If you have more losses than gains, you can deduct up to $3,000.00 on your tax return. Any additional losses will be carried forward to the next year. These are the basic rules for sales of securities.
Along with capital gains tax or ordinary income tax there is another tax that you need to be made aware of Net Investment Income Tax. IRC §1411 imposes a 3.8% tax on net investment income. Net investment income is income received from investment assets (before taxes) such as bonds, stocks, mutual funds, loans and other investments. The individual tax rate on these items depends on the type of income that is derived.
The Internal Revenue Service has issued proposed regulations on IRC §1411 net investment tax (NIIT). Because the law is new, and went into effect January 1st, the Service has issued these regulations as guidance for taxpayers. In addition, proposed regulations were issued for IRC §1401 which is the additional hospital insurance tax.
These are the basics of portfolio Income.
For more information visit www.smalleynco.com
If you have any questions you can email Craig W. Smalley E.A.
Author of the books: It Starts With an Idea – Tax Tips for Small Businesses available on Nook and Kindle, The Ultimate Real Estate Investor Tax Guide, available on Nook and Kindle, The Complete Guide to the New Tax Law – American Taxpayer Relief Act of 2012 available on Nook and Kindle, Everything You Wanted to Know about the IRS – Audits, Appeals and Collections available on Nook and Kindle, Tax Avoidance is Legal! The Complete Guide to Individual Income Tax available on Nook and Kindle, The Complete Guide to the Affordable Care Act’s Tax Provisions available on Nook and Kindle, The Complete Guide to Retirement Plans for Small Businesses available on Nook and Kindle, The Complete Guide to Estate, Gift and Trust Taxation, available on Nook and Kindle, and The Complete Guide to Hiring an Accountant, available on Nook and Kindle.