In America, the majority of taxable income comes from wages and salaries, with nearly 80% of taxpayers reporting over $9 trillion in salaries and wages for the 2021 tax year. Additionally, taxpayers reported almost $2.7 trillion in investment income, including interest, dividends, and sales of capital assets, as well as over $1.7 trillion in taxable retirement income from IRA distributions, pensions, annuities, and Social Security benefits.
Navigating your tax return can be tricky when it comes to investment income. Taxable interest must be reported, regardless of the amount received, and includes various sources such as bank or brokerage accounts, savings bonds, and Treasury securities. Tax-exempt interest may also be reportable, depending on the source of the interest. Asset location is crucial for minimizing tax liability, with certain investments being more advantageous in tax-favored retirement accounts.
Dividends are a significant source of investment income, with ordinary dividends taxed as ordinary income and qualified dividends taxed at capital gains rates. Capital gains are determined by calculating the increase or decrease in the basis of assets from acquisition to sale, with long-term gains subject to favorable tax rates. Tax-loss harvesting is a strategy used to offset capital gains by selling losing stocks, though wash sale rules must be considered to avoid losing the ability to claim the loss.
Compensation-related investments, such as equity compensation, can be taxed as ordinary income or capital gains, depending on the type of compensation received. Cryptocurrency is considered a capital asset, with gains and losses calculated similar to stocks. However, the value fluctuations in cryptocurrency do not result in realized gains or losses until the asset is disposed of.
Additional reporting may be required for foreign assets or certain investments that do not produce U.S. taxable income. The Net Investment Income Tax (NIIT) imposes a surtax on certain net investment income for taxpayers with MAGI over specific thresholds. It is essential to consult with a tax professional for guidance on investment income reporting and tax treatment, as tax law can be complex and subject to change.
