Investment Income

In the U.S., the rate at which your investment income — such as earnings from stocks, bonds, mutual funds, and real estate investments — is taxed can vary significantly depending on the type of investment and the duration it is held.

Capital Gains Tax

This applies when you sell an investment for more than you paid for it. The rates can vary based on how long you’ve held the investment. Can be short-term for assets held for one year or less and long-term for assets held for more than one year.

Dividend Income

Dividends paid by stocks, mutual funds, businesses are taxed in two categories: qualified and non-qualified. Qualified dividends, which come from shares held for a specific period, are taxed at the more favorable long-term capital gains rates. Non-qualified dividends are taxed at the ordinary income tax rates.

Interest Income

Interest earned from savings accounts, CDs, and bonds is usually taxed at your ordinary income tax rate. However, some bonds, like municipal bonds, may be exempt from federal taxes and, in some cases, state taxes, which can make them an attractive investment option for those in higher tax brackets.

Real Estate Investment Income

Rental income is taxed as ordinary income. However, real estate investors can take advantage of several deductions to lower their taxable income, including mortgage interest, property taxes, operating expenses, depreciation, and repairs. The sale of real estate can also result in capital gains, which are taxed according to the duration of ownership.

Three levers move investment-income tax, in descending order of size. Hold past one year, because the gap between your ordinary rate and the long-term rate is the largest single spread available — at the top, 40.8% against 23.8%. Place each asset in the account whose tax treatment it needs: ordinary-income producers behind a deferral wrapper, appreciating equities in taxable where the preferential rate and the step-up at death both apply. And harvest losses continuously, not merely in December (section “Tax-loss harvesting”). Everything else in this section is detail on how those three interact with specific instruments.