CCPA: Exploring Tax Attributes of Income Streams Amidst Rate Changes

With the Federal Reserve signaling the likelihood of rate cuts as soon as September, now is a great time to review the tax attributes of different income streams while considering strategies to lock in cash flows while rates remain high. Understanding the tax implications of various income sources can help you make informed decisions to optimize your tax liability. Below is an overview of the tax attributes of several popular income streams:

1. Regular Interest (e.g., CDs)

Federal Tax: Regular interest income, such as that from Certificates of Deposit (CDs), is generally subject to federal income tax. It is taxed at ordinary income rates, which can be as high as 37%, depending on your tax bracket.

State Tax: Many states also tax interest income, though the rates and exemptions can vary. Be sure to work with your tax advisors, like Harmony Group, to verify your specific state's tax laws to understand how this income will be treated.

2. Interest from U.S. Treasuries

Federal Tax: Interest earned on U.S. Treasury securities is subject to federal income tax. 

State Tax: Interest from U.S. Treasuries is exempt from state and local taxes, making them an attractive option for investors in states with high income tax rates.

3. Interest from Municipal Bonds

Federal Tax: Interest income from municipal bonds is generally exempt from federal income tax, making them a popular choice for tax-conscious investors seeking tax-free income.

State Tax: If the bonds are issued in your state of residence, the interest may also be exempt from state and local taxes. However, if you purchase municipal bonds from another state, the interest might be taxable at the state level.

4. Dividends

Federal Tax: Dividends are typically categorized into qualified and non-qualified (ordinary) dividends. Qualified dividends are taxed at capital gains tax rates, which are often significantly lower than ordinary income tax rates, whereas non-qualified dividends are taxed at regular income rates.

State Tax: Dividends are generally subject to state income taxes, but the specific rates and rules can vary widely from state to state.

5. Preferred Stocks

Federal Tax: Dividends from preferred stocks are often treated as qualified dividends, which means they may be taxed at the lower capital gains rate. 

State Tax: Like regular dividends, those from preferred stocks are usually subject to state income taxes.

Understanding these tax attributes can help you make strategic decisions about which income streams to focus on or expand. Whether you are considering investing in municipal bonds to take advantage of tax exemptions or exploring U.S. Treasuries for their state tax benefits, it's crucial to align your investment strategy with your tax planning to maximize after-tax returns. If you have questions or need personalized advice, our team at Harmony Group is here to assist you in navigating these complexities.