The question we’re answering today is, “How is investable income taxed?”
Different Types of Investments
There are different types of investments, right? I can buy a stock or, let’s say, a piece of real estate. I can hold it for 5 or 10 years, and then sell that piece of real estate. In the meantime I’ve collected rent, and that rent, net income wise, is taxable at ordinary income rates. That would be just like I pay tax on my regular income. In 2022, chances are the top tax bracket has gone to 39.6%. So if I’m in the top tax bracket from a federal level on that rental income, I’m paying 39.6%.
Capital Gains & Taxes
In 2021, again, going back before all these bills worked their way through the House and the Senate, capital gains tax rates were 20%. So if I own that building, collected rent, paid ordinary income tax for a while, then sold the building, whatever profit I make is taxed at capital gains rates. Why am I telling you this? Well, because where you’re taking your retirement income from depends on the amount of taxes you pay. One of the keys to having a good financial plan is to make sure that you take money out in the most tax efficient way possible. That might be the most tax efficient way possible this year. We like to plan for the most tax efficient way possible throughout your lifetime.
Investment assets and investment income are taxed at different rates, depending on your situation and on the type of income, whether it’s capital gains or ordinary income. We can help you figure that out. A good tax professional or financial advisor can help you figure that out. And the key is how do we make your returns on your investments as tax efficient as possible? It’s all about the after tax rate of return on your investment. Again, Joel Johnson here with money wisdom questions and answers.
Thanks for joining me and I hope you found this information helpful!
P.S. If you enjoyed this topic and want to learn more, download your copy of our guide, “Take Charge of Your Taxes”.
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