Chances are you have a general idea of how the many different types of income are taxed yet do not know the specifics of how Uncle Sam takes the money. After all, the federal system of taxation is not clear cut in the slightest. Most people assume there is regular income from wages and investment income stemming from investments. However, it is not that simple, largely because there are subcategories to investment income. Furthermore, there are other sources of income such as unemployment compensation. Let’s take a quick look at how each type of income is taxed come April.
Sell a security and the money you make on it is referred to as a capital gain. In most cases, securities held across the long haul incur tax at a rate of either 20%, 15% or 0%. Short-term capital gains are taxed at the ordinary rate for income tax.
Interest income is a component of regular income and taxed at the marginal rate in the year in which it is received. In fact, even if interest income is reinvested, it is still taxed at the marginal rate. This income is reported on the 1099-INT form. Interest income stems from bonds, high-yield savings accounts and certificates of deposit.
What About Retirement Income?
Withdrawals from 401(k)s, IRAs, pension income and annuities are usually taxable. However, withdrawals from employer-sponsored plans and Roth IRAs funded with contributions made after taxes are not taxable. Certain subcategories get a bit more complex. If you make in excess of $44,000 when filing jointly as a married couple or in excess of $34,000 if single, upwards of 85% of Social Security benefits are taxed.
Income from immediate annuities is taxed if the annuity is bought with money that has not been taxed. Municipal bond interest income is typically exempt from federal taxes. However, there is a chance interest income will be subjected to local or state income taxes, partial taxation or an alternative minimum tax.
Income From Dividends
Dividend income is obtained through equities. This money is provided to shareholders at specific intervals of time. Qualified dividends have the preferred rates applicable to long-term capital gains.
What About Unemployment Income?
Though few people are aware of it, the truth is unemployment income is taxable. The vast majority of the different types of unemployment compensation are taxable. In fact, even the additional $600 provided each week through the CARES Act during the coronavirus pandemic is also taxable. The
bottom line is the IRS considers unemployment compensation to be a form of income so it is taxed as such.
Any opinions are those of the author and not necessarily those of Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.