Money Matters: Taxable Interest Income

Published: Jul. 12, 2022 at 12:18 PM EDT
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COLUMBIA, S.C. (WIS) - What is taxable interest income and how can I understand it?

For the past few years most people haven’t had to worry about this because interest rates have been so low. With rates rising, this is definitely something people should be prepared for.

Basically, any interest you receive is taxed at your current income level, which is your highest tax rate possible. The other problem is this interest could lead you to pay into a higher tax bracket, pay more on social security, Medicare, or even lose your ACA subsidy. You want to keep a close eye on taxable interest.

How do you calculate your taxable interest?

It is fairly simple. Whether it is your bank, or your brokerage company each year at the end of the year they’ll send you a 1099 that reports all that taxable interest so you can throw it on the tax form.

With that being said, interest rates are going up. This could force you into an underpayment of taxes. This is one of those years that you’re shopping for better rates and keeping a close tally of exactly how much interest you’re earning.

Can you avoid these taxes?

Yes. You could just not receive the interest, which is not a good idea. Any type of income is good income, even if you have to pay taxes on it.

With that being said, there are other ways you can earn interest without paying nearly as much in taxes. First, look at tax free municipal bonds. Fixed rate annuities can also defer taxes. However, the biggest thing is to hold those taxable accounts inside a qualified account. This means you can defer those taxes even further.

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