Investment income explained

Investment income is money your investments pay you or earn for you. Each kind is taxed differently, which is why the same yield can leave two people very different amounts. IncomeGrid helps you discover higher-yield income opportunities you may not have looked at, so you can earn more on the same money. It has 40,000+ investment options screened, each with its yield, after-tax yield and a risk level from 1 to 5.

Kinds of investment income

Type	Federal tax (general rule)	State tax
Interest (bank, company bonds)	Ordinary income rates	Usually taxed
Treasury interest	Ordinary income rates	Exempt by federal law
Municipal bond interest	Usually exempt	Often exempt in-state, taxed out-of-state
Qualified dividends	Lower capital-gains rates	Usually taxed
Non-qualified dividends, most REIT distributions	Ordinary rates (some REIT income may qualify for a deduction)	Usually taxed
Capital gains	Short-term at ordinary rates; long-term at lower rates	Usually taxed

Source: IRS Publication 550 and Topic 404. Rules change; check current IRS guidance.

Net investment income tax

Above certain income thresholds, an additional federal tax applies to net investment income (IRS Topic 559). It is one more reason to compare yields after tax.

Accounts change the picture

Inside an IRA or 401(k), income is not taxed as it arrives; in a Roth, qualified withdrawals are tax-free. In a taxable account the type of income matters most. See Roth IRA income.

Earning more investment income

Earning more usually comes from three moves: putting idle cash to work, choosing the type that is taxed least for you, and comparing more options. IncomeGrid ranks every item by yield after tax for where you live: after federal, state and each investment type tax (Treasuries, municipal bonds, corporate bonds, funds, REITs and filed offerings are each taxed differently).

Reporting investment income

Banks, brokers and funds send forms (such as 1099-INT and 1099-DIV) that report interest, dividends and distributions; sales are reported on 1099-B. Tax-exempt interest is still reported on the return even though it is not taxed federally. Keeping these in mind helps you estimate what an investment really leaves you.

State rules differ

States tax investment income differently: some have no income tax, some exempt their own municipal bonds, and all must exempt US Treasury interest. That is why one national ranking can't show what you keep, and why IncomeGrid asks where you live.

How IncomeGrid helps you earn more

IncomeGrid helps you discover higher-yield income opportunities you may not have looked at, so you can earn more on the same money. It has 40,000+ investment options screened, each with its yield, after-tax yield and a risk level from 1 to 5. Choose where you live and every yield is shown after federal, state and each investment type tax, so you can see which options pay you more.

Earn more investment income → or browse example income portfolios

Frequently asked questions

What is considered investment income?

Interest, dividends, capital gains, rents and royalties, and distributions from funds and REITs.

Is investment income taxed differently from wages?

Some of it is: qualified dividends and long-term gains get lower federal rates, and some interest is exempt from federal or state tax.

How can I increase my investment income?

Compare yields after federal, state and each investment type tax and look beyond bank accounts.

Not investment advice. General information only; yields change, check the source before acting.