December 2022 Client Question: Not All Investment Income is Taxed the Same
By Francesca Lanza
Associate Portfolio Manager
For the Client Question of the Month, we review different types of investment income and the associated taxation rules following the IRS guidelines.
As we enter the final month of the year, it is important to be aware that not all income received from your investments is taxed the same. In addition, we provide the 2022 and 2023 federal income tax brackets for single filers, married couples filing separately or jointly, and head of households – the new 2023 tax brackets have been provided by the IRS and are adjusted for inflation.
Three different types of investment income and their associated IRS taxation rules:
*Under the Tax Reform Act of 1986, interest received on private purpose municipal bonds is subject to the Alternative minimum tax (AMT). AMT is a separate income tax computation under the IRS that eliminates many deductions and credits, creating a tax liability for an individual.
Examples of bonds subject to AMT: bonds issued for not-for-profit 501(c)(3) organizations and “private activity” issuers such as airports.
**The net investment income tax (NIIT) is a 3.8% tax on net investment income, such as capital gains, dividends, rental and other income after allowable deductions, to the extent the net amount exceeds a threshold. [applicable for individuals with modified adjusted gross income exceeding $200,000 or $250,000 for married taxpayers who are filing their taxes jointly.]
DISCLOSURES
Note:
Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply.
Government bonds and U.S. Treasuries are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
Corporate bonds are subject to credit, market, and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Disclosures:
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through Winthrop Wealth, a Registered Investment Advisor and separate entity from LPL Financial.
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< COMMENTARY
Client Questions | November 30, 2022
December 2022 Client Question: Not All Investment Income is Taxed the Same
By Francesca Lanza
Associate Portfolio Manager
For the Client Question of the Month, we review different types of investment income and the associated taxation rules following the IRS guidelines.
As we enter the final month of the year, it is important to be aware that not all income received from your investments is taxed the same. In addition, we provide the 2022 and 2023 federal income tax brackets for single filers, married couples filing separately or jointly, and head of households – the new 2023 tax brackets have been provided by the IRS and are adjusted for inflation.
Three different types of investment income and their associated IRS taxation rules:
Federal Income Tax Brackets
*Under the Tax Reform Act of 1986, interest received on private purpose municipal bonds is subject to the Alternative minimum tax (AMT). AMT is a separate income tax computation under the IRS that eliminates many deductions and credits, creating a tax liability for an individual.
Examples of bonds subject to AMT: bonds issued for not-for-profit 501(c)(3) organizations and “private activity” issuers such as airports.
**The net investment income tax (NIIT) is a 3.8% tax on net investment income, such as capital gains, dividends, rental and other income after allowable deductions, to the extent the net amount exceeds a threshold. [applicable for individuals with modified adjusted gross income exceeding $200,000 or $250,000 for married taxpayers who are filing their taxes jointly.]
DISCLOSURES
Note:
Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply.
Government bonds and U.S. Treasuries are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
Corporate bonds are subject to credit, market, and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Disclosures:
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through Winthrop Wealth, a Registered Investment Advisor and separate entity from LPL Financial.
DE