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One of the best ways to supplement your income is with diversified investments, but you must make sure to pay the capital gains tax rate and other taxes.

The importance of understanding the basis of investment taxes should not be neglected by a new investor. Every new investor should be knowledgable about their capital gains tax rate. But before looking into the world of capital gains, the investor must realize that there is more to this. In fact, during the tax season, a taxpayer needs to pay many different types of taxes.

As an investor, it is a person’s responsibility to pay taxes on the followings:

Dividend-Paying Investments

In simple words, dividends can be explained as the payments of income that come from companies where the investor owns stock. So, if an investor happens to own stocks via Exchange-Traded Funds (ETFs) or Mutual Funds, then it is the responsibility of the company to pay the dividend. The investor gets it when it is passed on through a fund dividend. The tax rate on dividends depends on both the investor’s 2018 tax brackets and for how long the investor has owned the shares in question.

Interest-Bearing Investments

Interest income is paid by different bank products like Certificates of Deposits (CDs) and Savings Accounts. In many cases, it is also paid by money market products and bonds. Interest is taxed at your usual tax rate. Here, it also should be mentioned that interest dividends from funds are also taxed like regular interest.

Capital Gains Tax Rate

These can be explained as profits from an investment. Capital gains are realized (and subjected to capital gains tax) when the investor sells their investments at a higher price than what they paid for it in the first place. The investor will owe the taxes on the amount of the profit. It is subject to a different capital gains tax rate depending on how long the investor has owned the investment.

Paying Investment Taxes

How much tax an investor has to pay in most cases depends on four different things, and they are:

The type of investment that the investor has made.

If the investments are in a tax-sheltered plan.

The tax law of the country the investor stays in.

The income of the investor.

Investment incomes like rent and interest are classified as ordinary income and they are taxed at the ordinary income tax rate. But when it comes to capital gains, then it will also be taxed at a long-term capital gains tax rate. Here it should be mentioned that qualifying dividends are also taxed like this as well. You should keep this in mind for taxes in investment income.

Paying investment taxes are now made easy because of many online tax calculators. Besides, for those who are looking for a more in-depth help, you can also sign up for FreeTAXUSA where you can file for free.



