Exploring the terrain of finances will eventually take you to investments. Further, when you reach that point, Investment Income is something you need to learn about. For people new to investing, it can be frustrating to confront new terms every day. This is something I entirely relate to. When I started investing myself, Instagram and TikTok gurus made me yawn.
That doesn't happen to you. That's why we have created this article. In this article, we have added all the necessary things you need to know about Investment Income. Furthermore, concepts like Investment Income Tax and other examples are also discussed for better understanding. So keep scrolling!
Investment Income Explained
In simple layman's language, Investment Income is the income you generate through different sources of investment. Moreover, this income can be your interest on your investment, a dividend, or a rental payment. Most people need to learn that the income from bonds is also considered investment income.
Suppose you have money in the bank, and you keep that in a savings account. The interest on that account is also considered an investment income. Because you loaned that money to the bank, and they made a profit, which was later added as interest in your account. Furthermore, That money was in circulation as an investment. That's why it is also included in the investment income. These were some points that are commonly misunderstood. Now, let's move towards the examples.
Best Investment Income Examples
There are many types of investment incomes. On top of that, income from every little investment source is counted. It is nearly impossible to count all of them. But further, we will discuss a few famous types of investment income. Besides that, to understand more profoundly the concept of investment income, let's eye into some significant examples.
1. The Income From Interests
The first and the most commonly known investment income is through interests. From small institutes to big banks, interest is a topic everybody likes. Moreover, interests are a great example of investment income. To explain further, people who invest in bonds and savings accounts earn interest and are included in this income. Besides that, bonds and savings accounts are popular ways to generate investment income.
2. The Income Received as Dividends
The second example of investment income is dividends. We all have heard of the stock market. On top of that, the stock market is the most famous thing in the investment world. Every small to prominent investor has a portion of their money invested in the stock market. The dividends that the companies give to the shareholders are also considered part of investment income.
3. The Income From Rental Property
The income generated from real estate investments and rental properties is an excellent example of Investment Income. Besides that, income from rental property is a great way to earn passive income. For people who own properties or inherited properties, it is part of investment income.
4. Business Generated Income
The last example we will discuss is income generated through businesses. Suppose that you have a business. When you earn a profit or income through that business. It is considered an investment income. As long as you are interested in the business and receiving your profit or income, it will be considered an investment income.
Summary of Investment Income Taxes
One thing that you might need to learn is that taxes are different on Investment Income. Furthermore, you are not the only one who thinks that. I didn't know when I first started investing. The tax rates differ for this type of income than for regular income. It varies from investment to investment. Therefore, we will discuss some of the most important types of investment income taxes. This will clear your primary concerns regarding taxation.
1. Taxes on Dividends Received
Now, let's talk a little about dividends received from corporations. Are they taxed? The simple answer is yes. But wait! There is a catch to it. Two types of dividends affect the taxation rate. For those who don't know, dividends are divided into qualified and non-qualified.
The only difference between qualified and non-qualified dividends is the tax rate. To explain it further, qualified dividends are taxed lower than non-qualified dividends. The qualified dividends are prioritized and given a tax relaxation. On the other hand, the non-qualified dividends are taxed at the regular income tax rate.
2. The Interest Income Taxes
Now, how are the earned interests taxed? This is not a simple question and can not be answered briefly. But to put it simply, most of the time, interest income is taxed like regular income. Interest earned from plans like 401(k) is not taxed until the individual withdraws. On top of that, bonds are also tax-free.
3. The Net Investment Income Tax or NIIT
If you have invested reasonably, you must know the NIIT. For people who don't know, this is an extra taxation for people who earn or exceed a threshold of income in the US. These taxes apply to the top or high-value earners in investments and returns. Usually, the threshold is $200k for individuals. The tax rate is around 3.8%.
Besides that, these taxes apply to some types of investment incomes. This includes bonds, interests, capital gains, and a few others. When the threshold exceeds these investments, then these taxes are applied.
Final Thoughts
Investment income is a simple concept of income generated through bonds, stocks, and other investments. Moreover, Investment Income accounting can be hectic for beginners. In this article, we have discussed Investment Income, its examples, and much more! After reading this article, you will know the basics of investment accounting, along with a few taxation rates. So, do read it to have a general understanding.
