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The ins and outs of tax on “income investments”

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Many investors, especially more risk-averse ones, hold much of their portfolios in “income investments” — those that pay interest or dividends, with less emphasis on growth in value. But all income investments aren’t alike when it comes to taxes. So it’s important to be aware of the different tax treatments when managing your income investments.

Varying tax treatment

The tax treatment of investment income varies partly based on whether the income is in the form of dividends or interest. Qualified dividends are taxed at your favorable long-term capital gains tax rate (currently 0%, 15% or 20%, depending on your tax bracket) rather than at your ordinary-income tax rate (which might be as high as 39.6%). Interest income generally is taxed at ordinary-income rates. So stocks that pay dividends might be more attractive tax-wise than interest-paying income investments, such as CDs and bonds.

But there are exceptions. For example, some dividends aren’t qualified and therefore are subject to ordinary-income rates, such as certain dividends from:

Real estate investment trusts (REITs),
Regulated investment companies (RICs),
Money market mutual funds, and
Certain foreign investments.
Also, the tax treatment of bond interest varies. For example:

Interest on U.S. government bonds is taxable on federal returns but exempt on state and local returns.
Interest on state and local government bonds is excludable on federal returns. If the bonds were issued in your home state, interest also might be excludable on your state return.
Corporate bond interest is fully taxable for federal and state purposes.

One of many factors

Keep in mind that tax reform legislation could affect the tax considerations for income investments. For example, if your ordinary rate goes down under tax reform, there could be less of a difference between the tax rate you’d pay on qualified vs. nonqualified dividends.

While tax treatment shouldn’t drive investment decisions, it’s one factor to consider — especially when it comes to income investments. For help factoring taxes into your investment strategy, contact us.

Proposed health care bill clears two House committees

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Following nearly 18 hours of debate, the American Health Care Act (AHCA) was approved by the Ways and Means Committee on March 9 by a 23-16 party line vote. The House Energy and Commerce Committee also approved the bill, which repeals and replaces the Affordable Care Act (ACA), although many ACA provisions will remain under the AHCA. Both parts of the legislation will now go to the House Budget Committee, which is expected to assemble the final bill that will then be voted on by the full chamber.

IRS Warns of E-mail Schemes

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The Internal Revenue Service noticed that email schemes in their name were being sent to many Americans. So far this tax season they have seen a “400 percent surge in phishing and malware incidents”. The e-mails being sent out ask taxpayers for information on wide variety of topics including refunds, filing status, confirming personal information, ordering transcripts, and verifying PIN information.

The forms of communication are not just limited to e-mail but have also occurred by way of text message.

The IRS Commissioner, John Koskinen, is urging people who receive these e-mails to not even open them. When the e-mail is open, and the link is clicked, people are being taken to an impostor website that asks for personal information. These sites may also have malware that can infect the computer and allow for criminals to steel information and track movement.

This scheme is affecting all regions of the country.

In addition to the email schemes, our clients are reporting to us that they are receiving phone calls from individuals claiming to be IRS agents and stating outstanding balances that need to be paid immediately. These calls are inaccurate. You should not provide any information to these individuals.

Raffensperger, Martin & Finkenbiner has been selected by readers of the Gettysburg Times as the Top Accountant in Pick of the Counties for four straight years. The experienced accounting firm is accepting new clients during this tax season and has daily hours 8:30-5pm and Saturday hours from 9-2pm.