Investing can be a little intimidating for people who have never done it before, but you don’t need to feel lost. This article will provide some simple and helpful tips that anyone looking to get started with investing should know beforehand.

If you are new to investing, it is important that you know about the tax basics. Here are a few things to consider when making an initial investment. Read more in detail here: do you pay taxes on initial investment.

New to investing? Know these tax basics

Taxes on investment income may be perplexing, particularly when investment income is taxed in a variety of ways. An investor may be aware with Gains on Investments taxes—the taxes levied when one sells a growing asset—but may be less knowledgeable about the tax consequences of Dividends, interest, and other investments.

Depending on the purpose and time for taking money out of the account, some kinds of investment vehicles—529 plans, retirement plans like 401(k)s and IRAs—are either not taxed until money is taken out of the account, or may never be taxed. However, general investment accounts are subject to taxation.

Knowing all of the tax responsibilities associated with your assets may save you time and money by preventing a surprise IRS payment. Working with a professional may be beneficial when an investor’s portfolio increases or when they need to sell assets to finance a purchase, such as a down payment on a house. However, all investors should become aware with the many sorts of taxes that apply to investment income, as well as certain possible tax-saving measures.

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Investment Income Taxes Come in a Variety of Forms


Investments are subject to a variety of taxes. These are some of them:

  • Dividends
  • Gains on Investments
  • Interest Earnings
  • Interest Earnings
  • Tax on Net Investment Income (NIIT)

Taking a closer look at each area will help you determine whether or not you owe money, as well as how much you owe.

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1. Dividends are subject to taxation.


Dividends are payments made to investors who own shares or otherwise have a stake in a partnership, trust, S-corporation, or other taxable organization as a corporation. Dividends are often distributed in cash from a corporation’s profits and earnings.

Some Dividends are ordinary Dividends, and are taxed at the investor’s income tax rate. Others, called qualified Dividends, are typically taxed at a lower Gains on Investments rate (more on that in the next section). Briefly, the distinction between the two is that stocks that are held for a short period of time are typically subject to a higher tax rate, while stocks held for a longer period of time are typically subject to the lower tax rate. For the full details, the IRS offers information on qualified and non-qualified Dividends .

If an investor’s dividends totaled more than $10 in a given tax year, they can expect to get form 1099-DIV from the business that paid them.

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2. More About Gains on Investments Tax


Gains on Investments are the profit an investor makes between the price of an asset when purchased, versus the price of an asset when sold. Gains on Investments taxes are the taxes levied on the net gain between purchase price and sell price.

There are two types of Gains on Investments taxes: Long-term Gains on Investments and short-term Gains on Investments. Short-term Gains on Investments apply to investments held less than a year, and are taxed as ordinary income; long-term Gains on Investments are held for longer than a year and are taxed at the capital-gains rate (for 2021, the IRS rates are no higher than 15% for most individuals, $0 if your taxable income is less than $80,0000)

The opposite of Gains on Investments are capital losses—when an asset loses value between purchase and sale. Sometimes, investors use losses as a way to offset tax implications of Gains on Investments. Capital losses can also be “carried forward” to future years, which is another strategy that can help lower an overall Gains on Investments tax.

Gains on Investments and capital losses only become taxable once an investor has actually sold an asset. Until you actually trigger a sale, movement in your portfolio is called unrealized gains and losses. Seeing unrealized gains in your portfolio may lead you to question when the right time is to sell, and what tax implications that sale might have. Talking through scenarios with a tax advisor may help spotlight potential avenues to mitigate tax burdens. is the source of this image.

3. Taxable Interest Earnings


Interest Earnings on investments are taxable at an investor’s ordinary income level. This may be money generated as interest in brokerage accounts or interest from assets, such as bonds or mutual funds. The only exception are investments in municipal (muni) bonds, which are exempted from federal taxes and may be exempt from state taxes if they are issued within the state you reside.

Interest Earnings (including interest from your bank accounts) is reported on form 1099-INT from the IRS. Tax-exempt accounts, such as a Roth IRA or 529 plan, and tax-deferred accounts, such as a 401(k) or traditional IRA, are not subject to interest taxes.

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4. Tax on Net Investment Income (NIIT)


The Tax on Net Investment Income (NIIT), now more commonly known as the “Medicare tax”, is a 3.8% flat tax rate on investment income for taxpayers whose adjusted gross income (AGI) is above a certain level—$200,000 for single filers; $250,000 for filers filing jointly. As per the IRS, this tax applies to investment income including, but not limited to: interest, Dividends, Gains on Investments, rental and royalty income, non-qualified annuities, and income from businesses involved in trading of financial instruments or commodities.

The tax is paid on the lesser of the taxpayer’s net investment income or the amount the taxpayer’s AGI exceeds the AGI threshold for taxpayers with an AGI over the necessary thresholds.

For instance, if a person receives $150,000 in salary and $100,000 in investment income, such as rental property income, their AGI is $250,000. They would owe NIIT on $50,000 since they are $50,000 above the threshold. To compute the actual amount the taxpayer owes, multiply $50,000 by 3.8 percent, or $1,900. is the source of this image.

Investing That Saves You Money


Creating a set of tax-efficient investing techniques is one strategy to offset the consequences of investment income. These are tactics that may help you reduce the amount of tax you pay on your assets while also allowing you to expand your wealth.

Among these tactics are:

  • Investing in both tax-deferred and tax-exempt accounts helps diversify your portfolio. A 401(k) is an example of a tax-deferred account, whereas a Roth IRA is an example of a tax-free account. Investing in these vehicles might be a long-term growth plan as well as a technique to guarantee that money is set aside for a certain purpose. While they are typically thought of as retirement vehicles, they may also be used for other purposes. Funds in a Roth, for example, may be used for eligible school costs.
  • Investigating tax-advantaged investments. Municipal bonds, exchange-traded funds (ETFs), treasury bonds, and dividend-free equities are some examples.
  • Considering tax implications of investment decisions. When selling assets, it can be helpful to keep tax in mind. Some investors may choose to work with a tax professional to help offset taxes in the case of major Gains on Investments or to assess different strategies that may have a lower tax hit. is the source of this image.

The Remainder


Investment income that is underreported or ignored may cause tax problems and result in a person underpaying their total tax burden. That’s why, even if you didn’t sell any assets throughout the year, it’s a good idea to maintain track of your investment income and be aware of any dividends and interest that may need to be reported.

Because the tax code is complicated, with different rules applying at different levels, familiarizing yourself with different types of taxes, analyzing any paperwork or forms you receive, and asking questions well before filing can help you ensure you didn’t miss any potential tax requirements when it comes to your investment portfolio.

Some investors may find working with a tax expert beneficial, as they may assist them understand the entire extent of their responsibilities and identify viable investment methods that might help them reduce their tax burden. A tax counselor will also be familiar with any state-specific investment tax requirements.

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If you’re new to investing, know these basic tax basics. The “investment taxes for dummies” is a great place to start.

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