IRS Publication 550: Investment Income is Taxed

Do you make money from investing?  Well tread lightly because there are all sorts of ways you can violate IRS rules and they’ll get you when you file your income tax return for the year if you don’t watch out.  Trust fund babies must pay income tax on their income.  Heirs of an estate must pay income tax on regular distributions from the estate.  It’s money coming in, so it’s considered income and therefor taxable by the IRS.  Even investment income to children, if it’s more than $1900 for the year, is taxable.  Not even children escape the taxing eyes of the IRS.

What doesn’t count is distributions from you IRA or 401(K), which are retirement accounts that are not taxable.  But most other types of investment income are taxable, and IRS Publication 550 will help you understand where to report that income on your tax return.  In general, the only kind of investment income that allows the taxpayer to still use the quick and easy 1040EZ is taxable interest under $1500 for the year.  Anything over that amount, and any other type of investment income, and the taxpayer must use either the full 1040 or the 1040A.

Types of Investment Income

Your savings account is actually a type of investment, and the interest on it is income.  Also considered investment income are:

  • capital gains distributions
  • certain types of dividends called qualified dividends
  • interest form Savings Bonds
  • Gains from selling stocks

Where to report these on your 1040?  Well you shouldn’t have to worry about this if you are using tax preparation software, which we wholeheartedly recommend!  Just answer the questions when you run the software and the investment income will be plugged into the correct fields to correctly fill out a proper Schedule d, Schedule B or whereever your investment income needs to be reported.

For a complete look at IRS Publication 550 visit the IRS website and take a look at all 79 pages if you like.  It’s very thorough!