Ways to prepare
What is taxable income?
Taxable income is income the IRS can tax you on. When we hear taxable income, we generally think of wages from a job or freelance work. Here are some additional income sources you can be taxed on:
- Interest income, whether from a savings account or bonds
- Dividend income
- Investment income, like short-term and long-term capital gains
- Rental income from a property you own
- Capital gains on the sale of a home (though there's an exemption that applies first)
- Unemployment benefits
- Severance pay
- Lottery winnings and other prizes
- Gambling winnings
- Alimony for agreements entered before 2019
- Jury duty costs
- Pension payments (though there are exceptions)
- Social Security benefits (there are exceptions for lower-income seniors)
- Traditional retirement plan withdrawals
- Settled debts where a portion of what you owe is forgiven (there are exceptions for bankruptcy filings)
What is tax-loss harvesting?
Tax-loss harvesting allows you to sell investments that are down, replace them with reasonably similar investments, and then offset realized investment gains with those losses. The end result is that less of your money goes to taxes and more may stay invested and working for you.
Are ETFs subject to capital gains taxes?
Investors who realize a capital gain after selling an ETF are subject to the capital gains tax. Currently, the long-term capital gains tax rate depends on the investor's modified adjusted gross income (AGI) and taxable income.
Are ETFs tax-efficient?
ETFs generate relatively little in the way of taxable capital gains compared to traditional mutual funds because they do not frequently buy and sell underlying assets. They also do not have to sell assets and create taxable capital gains in order to meet redemptions.
What are the tax implications for married couples filing taxes jointly?
Married couples can file taxes as married filing jointly. This can lead to tax savings for some taxpayers in the middle of the income spectrum.
Is municipal bond income subject to state and local taxes?
Income from tax-exempt municipal bonds is exempt from federal income taxes and from state and local taxes if the investor lives in the state that issues the bonds. There are also taxable municipal bonds that are subject to federal, state, and local taxes.
What are the tax advantages of a Roth IRA?
Roth IRAs have some tax advantages. Since contributions are made after taxes, you can withdraw those contributions any time tax-free and penalty-free. Once you reach 59½, you may be able to withdraw earnings tax-free.
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