Wednesday, December 8, 2021

The Same, But Different

Ask the CFP

Photo by Darcie Guerin

Before the effect one believes in different causes than one does after the effect. Friedrich Nietzsche 

Question: How are different types of income taxed? 

AnswerIn addition to earned income, there are several types of investment or unearned income; interest income, capital gains, dividends and retirement account distributions. It’s not a surprise that the tax system isn’t exactly streamlined or straightforward when it comes to how each of these are treated. There are various credits, deductions, tax brackets, Medicare surtaxes and a host of other categories that define income for tax purposes.  

Logically you’d think that there would be two distinct ways of taxing regular income and investment income. Regular income is what you get in your paycheck and investment income is what’s derived from investments, but even that has subcategories; each taxed differently. So here’s the breakdown. 

Interest Income 

This is generated by certificates of deposit and high-yield savings accountsrare these daysand bonds. Interest income becomes part of your regular income and is generally taxed at your marginal rate during the year in which you receive it, even if it’s reinvested. This is what gets reported on your 1099-INT forms.  

Capital Gains  

When you sell a security, any positive difference between what you paid and what you earned is called a capital gain. If you bought 1,000 shares for example, at $14 each and sold them for $20,000, you’d have a $6,000 gain that would be subject to taxes. For most people, securities held over a year (long-term capital gains) will either incur a 0%, 15% or 20% tax. Short-term capital gains are taxed at your ordinaryincome tax rate.  


Dividend income is derived from equities that pay shareholders dividends on a regular basis. Qualified dividends are treated to the same preferred rates as long-term capital gains. 

Retirement Income 

Withdrawals from traditional IRAs, 401(k) s or annuities and pension income are typically taxable, while withdrawals from Roth IRAs or employer-sponsored plans funded with after-tax contributions are not taxable; but some subcategories are trickier. If you make more than $25,000, or $32,000 if married filing jointly, up to 85% of your Social Security benefits will be taxed. Income from an immediate annuity is taxed if the annuity was purchased with money that has never been taxed, say in an IRA. Interest income from municipal bonds is generally exempt from federal taxes, but it could still be subject to state or local income taxes, alternative minimum tax, or partial taxation of the income in certain instances.  

These examples are merely guidelines. It’s important to remember that taxes aren’t the only thing to consider. Your professional tax and financial advisors can help you select appropriate income-generating securities for your needs and determine your exact tax liability. 

Next Steps 

As you plan for what taxes you’ll pay on your investments, start by:  

  • Understanding the different types of income. 
  • Considering your entire investment portfolio. 
  • Asking your advisor about the tax liability for each of your investments. 

The importance of cash-flow remains at the forefront of most everyone’s mind, especially during times of uncertainty. This may be an appropriate time to review and gain a greater understanding of the source and strength of your income generating holdings. Stay focused and plan accordingly.  

Raymond James does not provide tax services. Please discuss these matters with the appropriate professional. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Asset allocation and diversification do not ensure a profit or protect against a loss. U.S. Treasury securities are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. Certificates of deposit offer FDIC insurance and a fixed rate of return. The market value of fixed income securities may be affected by several risks including interest rate risk, default or credit risk, and liquidity risk. 

This material is being provided for informational purposes only and has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Any information should not be deemed a recommendation to buy, hold, or sell any security. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. Past performance may not be indicative of future results. The opinions expressed are those of the writer May 13, 2020, but not necessarily those of Raymond James and Associates, and are subject to change at any time based on market conditions and other factors. “Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.” This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239389-1041, email Website: 

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