Interest, Dividends, & Capital Gains
Individuals who receive substantial investment income from interest, dividends or capital gains usually have no Federal or State income taxes withheld from their investment income.
Such individuals should make estimated income tax payments on the investment income they earn quarterly. Otherwise, they may receive huge, unexpected income tax bills when their income tax returns are filed the following April:
- Calculate Your Net Investment Income
Federal and State tax authorities levy income taxes upon investment income under differing regulations. Please pay attention to such differences, as described below.
- Federal Income Tax
1. Interest - income received on funds deposited in bank checking and savings accounts, certificates of deposit (CDs), U.S. Savings Bonds and corporate or municipal bonds is reported on Schedule B and is subject to taxation as ordinary income at graduated tax rates.
2. Dividends - income received on stocks and mutual funds held as investments is reported on Schedule B. There are two types of dividends: ordinary dividends and qualified dividends. Ordinary dividends are subject to taxation as ordinary income at graduated tax rates. Qualified dividends are subject to preferential taxation at capital gains tax rates, as discussed below.
However, for most taxpayers, it is difficult to determine which dividends are classified as ordinary dividends and which dividends are classified as qualified dividends during the course of a year. Normally, such classifications are not made readily available until the taxpayer receives their Form 1099-DIVs in January or February of the following year. Thus, the more conservative approach is to assume that all dividends income received are ordinary dividends for tax planning purposes.
3. Capital Gains Distributions - received on stocks and mutual funds held as investments are reported on Schedule D, Part II, line 13. Capital gains distributions are subject to preferential taxation at long-term capital gains (LTCGs) tax rates, as discussed below.
4. Capital Gains - Almost everything you own and use for personal or investment purposes is defined as a “capital asset”. Examples of capital assets include a personal residence, personal-use items like motor vehicles and household furnishings, stocks, mutual funds or bonds held as investments, rental real estate, and trucks, equipment and machinery used in the course of business. When you sell a capital asset, the difference between the amount you realized from the sale and the adjusted basis in the asset is a capital gain or a capital loss. Generally, an asset's basis is its cost to the owner. However, if you received the asset as a gift or inheritance, there are certain adjustments that may need to be made to your basis.
If you sell the asset for more than your adjusted basis, you realized a capital gain. If you sell the asset for less than your adjusted basis, you realized a capital loss. Losses from the sale of personal-use property, such as your home, car or household furnishings are not deductible for income tax purposes.
Capital gains and losses are classified as long-term or short-term. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold the asset one year or less, your capital gain or loss is short-term. To determine how long you held the asset, you generally count from the day after the day you acquired the asset up to and including the day you disposed of the asset.
Capital gains and losses realized on the sale of stocks, mutual funds or bonds held as investments, your personal residence and vacation property are reported on Form 8949.
Capital gains and losses realized on the business property, including rental real estate, trucks, equipment and machinery used in the course of business are reported on Form 4797.
5. Net long-term capital gains (LTCGs) - If you have a net capital gain, a lower tax rate may apply to the gain than the tax rate that applies to your ordinary income at graduated tax rates.
First, some definitions:
• “Net capital gain" - The amount by which your net long-term capital gain (LTCG) for the year is more than your net short-term capital loss (STCL) for the year.
• “Net long-term capital gain" - Your long-term capital gains reduced by long-term capital losses, including any unused long-term capital loss carried over from previous years.
• “Net short-term capital loss” - The excess of short-term capital losses (including any unused short-term capital losses carried over from previous years) over short-term capital gains for the year.
Net capital gains are taxed at different rates depending on overall taxable income, although some or all net capital gain may be taxed at 0%.
Tax Year
Filing Status
Taxable Income
Federal Income Tax: Over But Not Over Long-Term Capital Gains (LTCGs) 2025 Married, Filing Jointly 600,051 20% 96,701 600,050 15% 0 96,700 0% Single 533,401 20% 48,351 533,400 15% 0 48,350 0% 2024 Married, Filing Jointly 583.751 20% 94,051 583,750 15% 0 94,050 0% Single 518,901 20% 47,026 518,900 15% 0 47,025 0% 2023 Married, Filing Jointly 553,851 20% 89,251 553,850 15% 0 89,250 0% Single 492,301 20% 44,626 492,300 15% 0 44,625 0%
There are several exceptions where capital gains income may be taxed at rates greater than 20%:
a. The taxable part of a gain from selling §1202 qualified small business stock is taxed at a maximum 28% rate.
b. Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.
c. The portion of any unrecaptured §1250 gain from selling §1250 real property is taxed at a maximum 25% rate. §1250 addresses the taxation of gains realized from the sale of depreciable real property, such as commercial buildings, warehouses, barns, rental properties, and their structural components at an ordinary tax rate. However, tangible and intangible personal properties and land acreage do not fall under this tax regulation.
§1250 is chiefly applicable when a company depreciates its real estate using an accelerated depreciation method, such as Bonus Depreciation or §179 Depreciation that results in larger depreciation deductions in the early life of a real asset, compared to the straight-line method. §1250 states that if a real property sells for a purchase price that produces a taxable gain, and the owner depreciates the property using the accelerated depreciation method, the IRS taxes the difference between the actual depreciation and the straight-line depreciation as ordinary income.
6. Net short-term capital gains (STCGs) - are subject to taxation as ordinary income at graduated tax rates.
7. Limit on the deduction and carryover of losses - If your capital losses exceed your capital gains, the amount of the excess loss that you can claim to lower your income is the lesser of $3,000 or your total net loss shown on your Schedule D, Part III, line 16. If your net capital loss is more than $3,000, you may carry the remaining loss balance forward to later years.
8. Net investment income tax (NIIT) - Individuals with significant investment income may also be subject to the net investment income tax (NIIT). The NIIT is a surtax of 3.8% imposed on net investment income, subject to the modified adjusted gross income (MAGI) thresholds of $250,000 (married couples filing jointly; $200,000 for single filers). This surtax is calculated on Form 8960. The NIIT was enacted as part of the Health Care and Education Reconciliation Act of 2010 and went into effect in 2013. All additional revenue raised by this surtax is deposited into the U.S. Treasury’s General Fund, not into the Medicare Trust Fund.
- State Income Tax (New Hampshire residents only)
The State of New Hampshire levies an income tax of 5.0% on interest and dividends income over $4,800 (married couples filing jointly; $2,400 for single filers). All capital gains income, whether realized from short-term or long-term investments, is not taxable income in New Hampshire. Add your interest and dividends income. This is your Net N.H. Investment Income.
The New Hampshire interest and dividends income tax is being phased out over a 3-year period, beginning in 2023. This income tax will be reduced each year, according to the following schedule:Taxable Period Ending On
N.H. Tax Rate
Dec. 31, 2023 4% Dec. 31, 2024 3% Dec. 31, 2025 and thereafter 0% - State Income Tax (Massachusetts residents only)
The Commonwealth of Massachusetts levies an income tax on all capital gains income. Investment income realized from interest, dividends and long-term capital gains is taxed at the more favorable rate of 5.0%. Investment income realized from short-term capital gains is taxed at the less favorable rate of 12.0%. Add your investment income from interest, dividends and long-term capital gains. This is your Net Massachusetts Investment Income. Add your investment income from short-term capital gains. This is your Net Massachusetts Short-Term Capital Gains Income.
Substantial changes to Massachusetts income tax became law under legislation titled An Act to Improve the Commonwealth's Competitiveness, Affordability, and Equity (Act), which went into effect on October 4, 2023 but was retroactive to January 1, 2023. One provision of this Act reduced the short-term capital gains rate from 12.0% to 8.5%, effective Jan. 1, 2023. As the long-term capital gains rate in Massachusetts is 5.0% (equal to the Massachusetts ordinary income tax rate), the income tax levied on short-term capital gains represents a 3.5% surcharge on that income.”
- Federal Income Tax
- Federal Self-Employment Tax Alimony income is not subject to the Federal Self-Employment Tax. Therefore you can skip Step 1(a)(2) in your Estimated Tax Payment calculations.
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