Tax Planning

Learn the essentials of taxes for investors, including how earnings from different types of investments are taxed and short vs. long-term capital gains.

How are investments taxed?

Earnings from investments are taxed in different ways and at different rates—or sometimes not at all—depending on the investment itself.
Here's a quick overview.

Tax exempt

  • Municipal bonds2
  • Investment gains in Roth IRAs

Ordinary income rates

  • Interest earned from bonds
  • Interest from cash equivalents
  • Ordinary income distributions
  • Short-term capital gains

Long-term capital gain rates

  • Gains from selling certain kinds of stock or
    ETF shares
  • Qualified dividends
In general, earnings from interest are taxed at ordinary income rates, just like wages. In contrast, earnings from appreciation—known as capital gains—may be taxed at lower rates. Some kinds of investment earnings are partially or completely tax-exempt, while investments in retirement plans such as a 401(k) or Traditional IRA are tax-deferred.

Understanding capital gains

Every investor needs a basic understanding of capital gains and how they are taxed. A capital gain occurs when you sell an investment such as a stock for a profit.

Short term

Less than a year

short term capital gains chart

If an investor owns stocks, ETFs, or bonds for less than a year, any gains or losses are short term and typically will be taxed at the same rate as ordinary income.

Long term

More than a year

long term capital gains chart

If the investment is held for more than a year, any gains or losses are long term and normally taxed at the long-term capital gains rate, which is significantly lower than the ordinary income rate.

Taxpayers with adjusted income above the applicable threshold are subject to the 3.8% net investment income tax for their long-term capital gains and qualified dividends.

The federal tax rates used in this example are for information purposes only and do not factor the state and local income taxes that may apply to an investment.

How does tax reform affect me?

The Tax Cuts and Jobs Act of 2017 brought many changes to the tax code, which took effect in the 2018 tax year. Let's take a look at some important changes.
representative image of the standard deduction

The standard deduction

For the 2019 tax year, the standard deduction goes up to $12,200 for single filers (includes married couples filing separately), $18,350 for heads of household, and $24,400 for married couples filing jointly.

 representative image of the personal exemption

The personal exemption

The personal exemption, which was $4,050 in 2017, has been eliminated.

 representative image of the standard deduction

The child tax credit

The child tax credit is expanding with a higher credit ($2,000 per child) and broader eligibility. There is also now a dependent tax credit of $500 for each qualifying non-child dependent.

 representative image of the deductions for home ownership

Deductions for home ownership

Deductions for mortgage interest have a lower cap, and state and local tax deductions are now limited.

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