Paying taxes on investment income | Vanguard (2024)

FAQs

Do I have to pay taxes on investment income? ›

Investment income may also be subject to an additional 3.8% tax if you're above a certain income threshold. In general, if your modified adjusted gross income is more than $200,000 (single filers) or $250,000 (married filing jointly), you may owe the tax. (These limits aren't currently indexed for inflation.)

What is the Capital Gains Tax rate? The amount of tax you're charged depends on which income tax band you fall into. Basic-rate taxpayers are charged 10% on their realised profits, while higher-rate (and additional rate) taxpayers must pay 20%.

Unlike an IRA or a 401(k), you can withdraw your money at any time, for any reason, with no tax or penalty from a brokerage account. How the returns from these accounts are taxed depends on how long you have held an asset when you choose to sell it.

How do you avoid the net investment income tax? You can avoid the net investment income tax by keeping your MAGI below $200,000 for single filers, $250,000 for those married filing jointly or $125,000 for those married filing separately. But that doesn't mean you have to make less money.

Use tax-advantaged accounts

Retirement accounts such as 401(k) plans, and individual retirement accounts offer tax-deferred investment. You don't pay income or capital gains taxes at all on the assets in the account. You'll just pay income taxes when you withdraw money from the account.

A 3.8 percent net investment income tax (NIIT) applies to individuals, estates, and trusts that have net investment income above applicable threshold amounts.

Short-term capital gains taxes range from 0% to 37%. Long-term capital gains taxes run from 0% to 20%. High income earners may be subject to an additional 3.8% tax called the net investment income tax on both short-and-long term capital gains.

Capital gains, interest, and dividends from investments

Similarly, it may be necessary for you to make estimated tax payments on investment income. You can use the Qualified Dividends and Capital Gains Worksheet” available in IRS Publication 505 to estimate the additional tax liability.

Do I pay taxes on investments if I lost money? ›

Capital Losses

For example. If you made $10,000 in investments, but lost $3,000, then you'd only pay taxes on $7,000. If your capital losses are more than your capital gains, you can deduct a capital loss of up to $3,000 per year. The rest is carried forward indefinitely.

For capital assets, like stocks or real estate, you are required to maintain the records necessary to show their original cost basis. If the IRS has reason to believe that your taxes are inaccurate or incomplete, it may conduct an audit.

While all capital gains are taxable and must be reported on your tax return, only capital losses on investment or business property are deductible.

Billionaires (usually) don't sell valuable stock. So how do they afford the daily expenses of life, whether it's a new pleasure boat or a social media company? They borrow against their stock. This revolving door of credit allows them to buy what they want without incurring a capital gains tax.

Although tax-exempt mutual funds usually produce lower yields, you generally don't have to pay federal taxes on earnings from tax-exempt money market and bond funds. And you can save even more if you live in a state that offers similar exemptions.

Earned income may include wages, salary, tips, bonuses, and commissions. Income derived from investments and government benefit programs would not be considered earned income. Earned income is taxed differently from unearned income.

Capital gains, interest, and dividends from investments

Similarly, it may be necessary for you to make estimated tax payments on investment income. You can use the Qualified Dividends and Capital Gains Worksheet” available in IRS Publication 505 to estimate the additional tax liability.