By Eric Reich
One of the areas of investing that you will often hear me stress, in addition to returns and fees, is, of course, taxes. Taxes, like fees, reduce your overall net returns. Remember, it isn’t what you make; it’s what you keep that matters. While generating income from our investments is often one of the goals for investors, investment income affects more than just regular income or capital gains taxes. You need to be mindful when making large transactions within your non-IRA investment accounts because you could be affected by one or more of these potential costs.
For younger investors, investment income can have an effect on your Student Aid Index (SAI) for college financial aid. Your SAI is determined by filing your FAFSA. The higher your income, the higher your SAI, which can cause a decrease in overall aid.
If you get your insurance through the Healthcare Marketplace, you have to watch out because investment income can affect the amount of tax credit you receive. The higher the income, the lower your credit may be, which can have a dramatic effect on your premiums going forward.
For older investors, the area to watch out for is your Medicare Part B premiums. The higher the investment income, the greater the potential premiums you will pay. In 2024, Medicare Part B premiums can range from $174.70 all the way up to $594. It could also have an effect on your Part D premiums, which can range from $0 up to $81 based on your income.
Social Security taxation can also be affected by investment income. For those who are married and filing jointly, Social Security benefits are not taxable for incomes below $32,000 per year in 2024. If your income falls between $32,000 and $44,000, 50% of your Social Security benefits are subject to tax. Lastly, those above $44,000 will see 85% of their Social Security benefits subject to taxation. For clarification, the tax is not 85%. Instead, 85% of the amount of the benefit you receive is subject to tax at whatever your marginal tax rate is.
As you can see, generating income from your investments can have an impact on more than just your regular income or capital gains taxes. The more of these hidden costs that affect you, the lower your overall net returns can be. Before making any large transactions within your investment portfolio, you should discuss them with both your financial advisor and your CPA to make sure that you aren’t causing bigger tax problems than you expect.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
