Investment Income

Definition

Investment income is the return earned from different types of investment assets. This can include dividends from stocks, interest from bonds or savings accounts, and capital gains from the sale of securities or investment properties. Unlike earned income from employment, investment income is usually passive and can be highly tax-efficient depending on the jurisdiction.

Examples

Dividends: Payments made by a corporation to its shareholders, usually in the form of cash or additional stock, derived from the company’s profits.
Interest: Earnings on funds deposited in a savings account, certificate of deposit, or payments made by bond issuers to bondholders.
Capital Gains: The profit made from selling an asset (such as stock, real estate, or other investments) for more than its purchase price.

Frequently Asked Questions (FAQs)

What are the common types of investment income?

The most common types of investment income include dividends, interest, and capital gains. Dividends are paid out by companies to shareholders, interest is earned from bonds or savings accounts, and capital gains occur when you sell an asset for a profit.

How is investment income taxed?

Investment income is often taxed differently than ordinary income. For example, dividends might be taxed at a lower capital gains rate, while interest income is usually taxed at the same rate as ordinary income. Capital gains taxes depend on the holding period of the asset; long-term capital gains (held for more than a year) typically receive a lower tax rate compared to short-term capital gains.

What is the difference between portfolio income and passive income?

Portfolio income comes from investments like stocks, bonds, and other securities, whereas passive income comes from rental activities or businesses in which the individual does not actively participate, like limited partnerships.

Investment Property: A real estate property purchased with the intention of earning a return on the investment through rental income, the future resale of the property, or both.

Investment Interest Expense: The interest paid on money borrowed to acquire investments. This expense may be deductible for tax purposes, but there are limitations.

Kiddie Tax: A tax provision in the United States that aims to prevent wealthier individuals from shifting investment income to their children to take advantage of the lower tax rates available to minors.

Online Resources

Suggested Books for Further Studies

“The Intelligent Investor” by Benjamin Graham - This book provides foundational knowledge on investing principles and strategies.
“Rich Dad Poor Dad” by Robert T. Kiyosaki - A good read to understand the mindset required for generating passive income and investments.
“Investing For Dummies” by Eric Tyson - A clear, comprehensive guide to understanding various investment vehicles and methods for generating income from them.
“A Random Walk Down Wall Street” by Burton G. Malkiel - Details the importance of diversified investment strategies and understanding capital markets.

Fundamentals of Investment Income: Finance Basics Quiz

### Which of the following is considered as investment income? - [ ] Salary from a job - [x] Dividends from stocks - [ ] Sales revenue from a personal business - [ ] Service fee from freelancing > **Explanation:** Dividends from stocks are considered investment income, whereas salary, sales revenue, and service fees are forms of earned income. ### How are long-term capital gains typically taxed in comparison to short-term gains? - [ ] At the same rate - [x] At a lower rate - [ ] At a higher rate - [ ] Not taxed at all > **Explanation:** Long-term capital gains, which involve assets held for more than a year, are generally taxed at a lower rate compared to short-term gains, resulting from assets held for a year or less. ### Which type of investment is known for paying interest? - [ ] Stocks - [x] Bonds - [ ] Real Estate - [ ] Mutual Funds > **Explanation:** Bonds are financial instruments that pay interest to investors over time, which is a form of investment income. ### What is the term for profits made from selling an investment at a higher price than the purchase price? - [ ] Dividends - [ ] Reinvestment - [ ] Interest income - [x] Capital gains > **Explanation:** Capital gains refer to the profit made when an investment is sold at a higher price than its purchase price. ### What type of income is generally considered passive? - [ ] Salary - [ ] Freelance income - [ ] Consulting fees - [x] Rental income > **Explanation:** Rental income is typically considered passive because it generates income without the need for active management, unlike a salary or consulting fees. ### Investment income from non-taxable bonds is known as what? - [x] Tax-exempt income - [ ] Tax-deferred income - [ ] Ordinary income - [ ] Passive loss > **Explanation:** Income from non-taxable bonds is referred to as tax-exempt income, meaning it is not subject to federal income tax. ### Which tax provision is designed to prevent shifting investment income to children for lower tax rates? - [ ] AMT - [x] Kiddie Tax - [ ] Gift Tax - [ ] Estate Tax > **Explanation:** The Kiddie Tax is a provision in U.S. tax code designed to prevent parents from shifting investment income to their children who have lower tax rates. ### What is the primary goal of owning investment properties? - [ ] Personal use - [x] Earning a return through rental income or resale - [ ] Saving on property taxes - [ ] Avoiding home maintenance costs > **Explanation:** The primary goal of owning investment properties is to earn a return through rental income or profit from the future resale of the property. ### What can be done with interest earned on a savings account? - [x] It can be taxed as ordinary income. - [ ] It can be deducted from taxable income. - [ ] It avoids taxes completely. - [ ] It can only be taxed after withdrawal. > **Explanation:** Interest earned on a savings account is generally considered ordinary income and is subject to taxation accordingly. ### Which type of income is derived from dividends paid by corporations to its shareholders? - [x] Portfolio income - [ ] Active income - [ ] Passive income - [ ] Earned income > **Explanation:** Dividends paid by corporations to shareholders are considered portfolio income; they are returns on investment, not income earned from active employment or business operations.

Thank you for exploring the nuances of investment income through our detailed dictionary entry and engaging quiz. Your continuous learning in the finance domain enhances your ability to manage and grow wealth effectively.

Investment Income