Whether you socked away money in a high-yield savings account or saw a windfall from your Big Tech winners last year, you probably did well – and it’s almost time to pay the Tax Man. The Internal Revenue Service began accepting 2024’s income tax returns this week. April 15 marks the federal deadline for filers, unless they go on extension until October. Any sums owed to the IRS, however, must be paid by April 15, or else penalties may apply. While the Federal Reserve began dialing back interest rates last fall, investors spent much of 2024 enjoying attractive yields on a range of plain-vanilla savings products. Some banks were still offering annual percentage yields of more than 5% on 1-year CDs last summer . “In theory, they shouldn’t be surprised if they were earning interest income last year,” said Catherine Valega, certified financial planner at Green Bee Advisory. “People forget that they earned a decent amount of income – it’s this esoteric income that people forget about and then they have this shock,” she said. The shock is that the additional yield you were picking up on high-yield savings accounts, CDs and most money market funds held in taxable accounts is taxed as ordinary income, where the very top marginal rate is 37%. “You still earned decent income if you paid attention and put your money into CDs,” said Valega. Watch the mail and plan ahead Investors should watch the mail for tax forms disclosing the amount that they earned on their interest-bearing assets. Institutions that paid at least $10 of interest in the prior year are required to send along a Form 1099-INT . Perhaps you held some winning dividend payers in a brokerage account last year. Keep an eye out for Form 1099-DIV or a consolidated 1099 from your brokerage. Qualified dividends are subject to the friendlier long-term capital gains rate of 0%, 15% or 20%, depending on your federal tax bracket. “I know people are antsy to file their tax returns, but you have to wait until you get these documents in the mail,” said Tim Steffen, certified public accountant and director of advanced planning, private wealth management at Baird. “These documents – investment income – don’t start coming until at least mid-February and can stretch into mid-March,” he added. Indeed, some of the investors who may be waiting until March for all of their details include those who are in partnerships. Master limited partnerships themselves aren’t subject to federal income taxes, but the limited partners – that is, the investors – are on the hook for income distributed. That’s different from the treatment for C-corporations, which are subject to corporate taxes, and whose investors pay taxes on dividends received. Partnerships can offer hefty yields exceeding 6% because of their preferential tax treatment, but investors must receive a Schedule K-1 from the partnership to file their taxes. “Most of those are issued in March, but it’s very possible that you can get one that comes later than that,” said Steffen. If you file before you get the K-1, you’ll have to amend your return – which comes with added cost and complexity. Avoid hiccups As you gather documents to prepare your taxes, take stock of where you’re holding your income-generating assets. For starters, limited partnership interests held in an individual retirement account can result in a tax liability that’s known as “unrelated business taxable income.” That means the retirement account itself will need to file a return. On a simpler note, when your brokerage reports your capital gains to you, check your basis and make sure it’s correct – particularly if you had been reinvesting in the asset over time. “The brokerages are pretty good about tracking that, but if you do it on your own, you might not catch it,” said Steffen. You should also make note of state tax issues that may arise, as certain assets are subject to different treatment under state and federal laws. For instance, interest income from Treasury securities is exempt from state and local income taxes, but is still subject to federal levies. “Some things are taxable for federal but not state, and vice versa,” said Steffen. “Be sure you’re not missing out on that.”
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