Portfolio and Non-Taxable Income - How Is My Income Taxed?

Jun 15, 2022

This is our fourth article that we are doing on "How Is My Income Taxed?". Understanding how different types of income are taxed can be confusing and it is something we see pop up in our Free Facebook Group and Tax Minimization Program all the time.

If you haven't checked out our first article, What Is Ordinary Income Tax vs Capital Gain Tax?, check it out now!

There are three main types of income that we want to focus on:

Today we are going to be focused on portfolio and non-taxable income. 

What Is Portfolio Income?

This could also be called "investment income". Per the IRS, this generally includes interest, dividends, capital gains, and other types of distributions including mutual fund distributions.

How Is Portfolio Income Taxed?

Portfolio income is not subject to FICA or self employment taxes. Various types of portfolio income are taxed differently, ordinary income tax rates and capital gain tax rates. Here are some examples:

  • Interest: Taxed at ordinary income tax rates
  • Unqualified/Ordinary Dividends: Taxed at ordinary income tax rates
  • Qualified Dividends: Taxed at capital gain rates
  • Municipal Bonds: Normally tax-free for federal but may be taxable at state level
  • Sale of Asset/Stock: Taxed at capital gain rates 
  • Taxable Retirement Accounts: Taxed at ordinary income tax rates
  • Roth Retirement Accounts: Tax free

For those with significant income you may also be subject to the net investment income tax (NIIT) which would be an additional 3.8% on top of the usual capital gain tax.

What Is The Good Thing About Portfolio Income?

The good thing about portfolio income is that it is not subject to FICA or self employment taxes and certain types get the preferred capital gain tax treatment.

One major downfall to portfolio income is that typically you are not able to take deductions (write-offs) against it like you can with passive or self employed income.

What Type Of Income Is Non-Taxable?

Fortunately there is some income that is not taxable which includes:

  • Gifts and Inheritances - May be subject to estate taxes paid by the estate itself, check out our article, How Are My Assets Taxed When I Die?. Income that the gift produces would be taxable.
  • Most Employee Benefits
  • Health Savings Account Funds (used for qualified medical expenses)
  • Most Life Insurance Proceeds 
  • Municipal Bond Interest
  • IRA Rollovers
  • Property Settlements at Divorce
  • Child Support Payments
  • Workers Compensation
  • Disability Insurance Proceeds (if you paid premiums yourself)
  • Federal Tax Refunds
  • State Tax Refunds (if you didn’t previously itemize the tax)
  • Most Scholarships and Fellowships
  • Some States Have No Income Tax
  • Roth Retirement Accounts - Assuming you meet rules

Portfolio and Non-Taxable Income - Summary

  • Portfolio income aka "investment income" is interest, dividends, capital gains, and other types of distributions including mutual fund distributions.
  • Portfolio income is not subject to FICA or self employment taxes.
  • Depending on the type of portfolio income it will usually be subject to either ordinary income taxes or capital gain tax.
  • There is some income you can receive that is non-taxable.

As always if you are looking at how to lower your taxes, check out our Tax Minimization Program where we deep dive into strategies to ensure you're paying the least amount in taxes as legally possible while giving you access to our team for those questions that pop up along the journey!

 

The Time Is NOW To Start Paying Less In Taxes. Join Our Tax Minimization Program (w/ Stress Free Bookkeeping Training)!

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