On fixed income investements are the monthly dividend payouts taxed at the 15% dividend rate or is it income?

Question

Are the monthly dividends considered straight income ot be added to your yearly income or are these texed at 15% rate. I am talking about taxable fixed income investments.

Answer 1

The first thing you need to do is look at the prospectus for the fixed income investment and see what is generating the income. Most of these investments generate income from bonds.

Most of that income is going to be interest. Sometimes the payments are called dividends but are in fact interest.

Interest income gets no tax break whatever it is called. It will be added to your other income and taxed as ordinary income.

If you have some kind of taxable investment that is based on dividend-paying stocks, and you get a monthly check for that, then those could be dividends for IRS purposes. If those dividends are from most domestic corporations, they are mostly "qualified" to be taxed at a maximum of 15%.

This second scenario is not very likely because an investment that is going to pay you a fixed income is more likely based on fixed income investments, namely bonds.

If your investment is going to be paying you back your original contribution over time, that has tax implications as well and you should consult with a tax professional knowledgable about taxable annuities to figure the taxes on the payments you will receive.

Answer 2

This depends upon the characterization of the dividends. Basically there are two types: Ordinary dividends and qualified dividends. The firm(s) paying the dividends will send you statements that tell you how much of each type were paid to you.

Ordinary dividends are taxed as ordinary income, they're just added on to the rest of your income. Qualified dividends represent a payout of capital gains and are taxed as long-term capital gains. The rate for capital gains depends upon your marginal tax rate. If your marginal rate is higher than 15% the rate is 15%. If your marginal rate is 15% or less, the rate is 5%. You won't know your marginal rate until you complete your tax return although if you're looking at a lot of qualified dividends paid out this year it may be worth a consultation with a CPA or other tax pro to see where you might stand so that you can be prepared for the tax bill.