It’s tax season, and it’s important to know what to expect regarding investment taxes. Taxes can affect how much money you make from your investments, so it’s important to understand them. For specific information about taxes on dividends, check out the IRS website. However, it’s always best to talk to a tax expert for the latest and most complete information. Tax laws are complex, and it is helpful to consult a financial advisor or tax professional for advice on structuring your investments for the best tax outcomes. Below is a simple informational guide to investment tax basics.

1. Know the types of investment income

There are two types of investment income: ordinary income and capital gains. Ordinary income includes interest from bonds, stock dividends, and rental income. Capital gains occur when you sell an investment for more than you paid.


Capital gains tax is when you sell an asset for more than you paid for it and make a profit. The government (both federal and some states) will tax this profit. The tax rate depends on how long you held the asset before selling it. If you held the asset for less than a year, it’s considered a short-term capital gain and is taxed like regular income. If you held the asset for more than a year, it’s regarded as a long-term capital gain and is taxed at a lower rate.

2. Understand the tax implications of dividend income

Dividends are payments made to shareholders by companies. Dividends are taxed as ordinary income and are subject to your marginal tax rate. The tax rate on dividends depends on the type of dividends and where the company is based. If the company is based in the U.S. or in a country with a tax agreement with the U.S., shareholders will pay a lower tax rate of 20% on “qualified dividends.” If the company is based elsewhere, the dividends are considered “non-qualified” and taxed at a higher rate, like regular income.

3. Consider tax-advantaged investments

Investments such as IRAs (Individual Retirement Accounts) and 401(k)s offer special tax benefits which may lower your tax bill. For example, when you contribute to a traditional IRA, you can deduct the contribution from your annual taxable income, reducing your overall tax bill. Additionally, the money in your traditional IRA can grow tax-deferred until you withdraw it in retirement.


This means you don’t have to pay taxes on the investment gains while the money is in the IRA. You’ll only pay taxes on the funds when you withdraw them during retirement. You may even be in a lower tax bracket, which can result in a lower overall tax bill.


401(k) plans offer similar tax benefits. Contributions to a 401(k) plan are made pre-tax, meaning you only pay taxes on the money once you withdraw it in retirement. The investment growth in a 401(k) is also tax-deferred, so you don’t pay taxes on the investment gains until you withdraw the money.


It’s important to keep in mind that while these tax benefits can help reduce your tax bill, there are restrictions and requirements you’ll need to follow to take advantage of them. For example, there may be limits on the amount you can contribute to an IRA or 401(k) each year, and there may be penalties for withdrawing money before retirement age.¬†

4. Keep track of your investment transactions 

It’s important to keep accurate records of your investment transactions, including the date of purchase, the purchase price, and the sale price. This information will be necessary when calculating your capital gains and losses for tax purposes.

Final thoughts

Understanding the tax implications of your investments is an essential part of financial planning. By following these basic guidelines, you can make informed decisions that will help you maximize your returns and minimize your tax bill. It’s important to have a tax and wealth management advisor to help with your financial plan. Remember this post is intended for informational purposes only and you should always consult with a tax professional regarding your specific circumstances. When you work with us, we can connect you with experienced tax advisors who can help with your investment strategy. Get in touch with us today to learn how we can support you on your investment journey.