Investing Basics flipbook_2024

If you take advantage of tax-deferred plans such as 401(k)s and IRAs, you generally don’t have to worry about paying taxes until you start withdrawing the money, generally in retirement. But when it comes to taxable accounts, it might be wise to consider the tax implications of your investment decisions. Investment Tax Treatment The tax code treats long-term capital gains and qualified dividends more favorably than ordinary income (wages or interest from bonds and savings accounts). Generally, dividends on stocks that are held for at least 61 days within a specified 121-day period are considered “qualified” for tax purposes. Long-term capital gains are profits on investments held longer than 12 months. Nonqualified dividends and short-term capital gains are taxed as ordinary income. High-income taxpayers may also be subject to a 3.8% net investment income tax (officially called the unearned income Medicare contribution tax). The surtax applies to the lesser of (a) net investment income or (b) the amount by which modified adjusted gross income exceeds $200,000 (single filers) or $250,000 (joint filers). Net investment income includes capital gains, dividends, interest, royalties, rents, and passive income. Managing Your Tax Burden Single filers Joint filers Tax rate Long-term capital gain & dividend tax (2024 taxable income thresholds) Up to $47,025 Up to $94,050 0% $47,025 up to $518,900 $94,050 up to $583,750 15% More than $518,900 More than $583,750 20% Net investment income tax (2024 modified AGI thresholds) Over $200,000 Over $250,000 3.8% These income thresholds are for the 2024 tax year. Because short-term capital gains on investments held 12 months or less are taxed as ordinary income, investors in the top 37% tax bracket could owe up to 40.8% on short-term gains.