Not All Investment Income Is Created Equal Because of Taxes: Case Studies

Earlier, we discussed how the 3 types of investment income can have a big impact on your taxes. Your knowledge or ignorance of these issues can have a major effect on your standard of living. 

How? Let us take a look.

Why the real income you make comes after taxes come out

Taxes are a major, if not the largest expense for most people. They can take a bite out of any income you generate, in some states they run close to 50%.

Yields, the amount of pretax income generated per dollar of a given investment, are often presented as independent of taxes. Yet, yield in and of itself does not really tell you how much money you will receive. 

Taxes are a real expense for your wallet. The true income you earn comes after the tax man takes his “fair share”, not before. 

The good news is that awareness and prudent management around the different tax categories of income can help you. You can have significant influence over maximizing income after tax. Whether it’s investments that pay income, which could be friendly to your wallet or end up costing you some hefty taxes.

How we help others: a case study

Let us examine situations of how we have helped other people navigate through these complex issues. We cannot give you specific names, but the example below is fairly typical.

Hypothetical Martha and Fred are a family who seek additional income. The family pays meaningful taxes even without investment income. They own both taxable and qualified accounts. 

They might want to house sources of ordinary income in their tax-deferred/qualified accounts. The ordinary income generated would not count against their other taxable income. Additionally, they would not pay tax on income generated for that year. (However, a tax-deferred account would mean they eventually pay tax once they begin to take Required Minimum Distributions. Alternatively, if they were to take money out before age 70.5, they would also owe tax.)

Fred and Martha could place investments that generate qualified dividends in their taxable accounts.  Such income in a taxable account would not count against their AGI. Additionally, they would pay a lower tax rate under long-term capital gains rate rather than ordinary income tax.

Let us help you deal with the issues

Are you ready to deal with income and taxes? If you feel a little overwhelmed, we are here to help. 

Come schedule a free consultation so we can help you figure out the best ways to generate income after taxes.

Do not go broke by stretching for income! Read our white paper to learn the 3 common potholes you need to steer clear of.

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