What is investment income?
Investment income is money that someone earns from an increase in the value of investments. It includes dividends paid on stocks, capital gains derived from property sales and interest earned on a savings or money market account.
Whether self-employed or working for a company, most people earn the majority of their money through income received for doing work. Many of these people also use investment vehicles such as a 401(k) and stocks to save for retirement.
As these investments increase in value, they produce interest income that can accumulate over time to produce investment income. The investment income later pays for significant purchases like a child’s college education, real estate and retirement.
In most cases, investment income is taxable. The tax rate varies, depending on the type of investment.
Capital gains, or the profit made through the sale of property, have a tax rate up to 20 percent for long-term investments. The tax rate for interest earned on an account equals the taxpayer’s marginal tax rate.
Dividends have several tax rates, ranging from 15 percent for qualified dividends to 39.6 percent for dividends paid to the highest wage earners in the country.
Investment income example
The stock market provides an example of investment income. If you purchase 10 shares of stock for $20 each, you have $200 invested in a company that’s listed in stock market. When the value of those stocks increases to $25 per share, you earn $50 on the investment.
Investment income is not limited to stocks and bonds. Real estate also can provide investment income. For example, you can purchase a rental home for $100,000 and rent it for the next 15 years to cover the cost of the mortgage and maintenance expenses. If you later sell the property for $150,000, you earn $50,000.
Are you looking for ways to increase revenue from investment income? Use Bankrate’s return on investment calculator to estimate how much money you can bring in through your investment.