Income-generating investments could create a tax bill. How to prepare
The tax-filing season is officially underway, and investors – especially those who are holding income-generating assets – will want to prepare to pay the tax man. The Internal Revenue Service began accepting 2025’s individual income tax returns on Monday . Filers have until April 15 to submit their returns, unless they go on extension until October. They also have until April 15 to pay any taxes owed. In all, the IRS anticipates receiving about 164 million individual income tax returns this season. While it may be tempting to rush your tax return – especially if you think you’re owed a refund – investors may want to take a breath before they get started. That’s because they will need a slate of additional tax forms in order to complete their tax return, and some of those documents may not show up until the spring. “My advice would be to not be in a rush to file,” said Catherine Valega, certified financial planner and enrolled agent at Green Bee Advisory in Burlington, Mass. “Hold off on the return until you are sure you got all of the documents.” Capital gains, income and taxes Investors who cashed in a few chips as the S & P 500 jumped 16% in 2025 will likely be on the hook for capital gains taxes. If you held the asset for more than a year, the gain you captured is considered long term, and it’s subject to a rate of 0%, 15% or 20%. Those who sold after holding the asset for less than a year, however, will see their appreciation taxed as ordinary income at a rate that could be as high as 37%. But you don’t have to sell your holdings to incur a tax bill. Investors who have dividend-paying stocks and exchange-traded funds will be subject to taxes on the income stream if they’re holding those assets in a taxable brokerage account. Qualified dividends are taxed at the same level as long-term capital gains —and you’re subject to taxes regardless of whether you spend the dividend or reinvest it. Keep an eye on your mailbox or your email account, as brokerage firms will issue Form 1099-DIV for dividend payments and a Form 1099-B for proceeds from the sale of stocks and other assets. Forms related to investment income may start rolling out to investors starting in February. Brokerages may also give you a consolidated form that has these details, and you can use it to prepare your taxes and figure out what you owe. Bonds, bond mutual funds or exchange-traded funds and even boring interest-generating assets like money market funds and high-yield savings accounts can result in a Form 1099-INT for the investor. Yields on money market funds were well off their highs in 2025 as the Federal Reserve cut interest rates three times, bringing the target interest rate range to 3.50% to 3.75%, but investors will still face reporting and payment requirements on the interest they received. Interest from bonds, bond funds, money market funds and savings accounts is taxed as ordinary income. Finally, certain investors will find themselves waiting until March if they’re holding master limited partnerships. MLPs aren’t subject to federal income taxes, leaving investors responsible for taxes owed on income distributions. Because of this difference in tax treatment, MLPs can offer yields exceeding 7%. The catch is that investors will be waiting for Schedule K-1 come tax time – and that form can show up very late in filing season. They’re also more complex to report. “Within these K-1s you can have income, capital gains and return of capital – the K-1s are more involved,” said Brian Kearns, CPA and CFP at Haddam Road Tax and Consulting in Evanston, Ill. Takeaways from your filing If gathering these documents is time consuming — or worse, resulting in you filing a late tax return on a regular basis — it may help to work with your financial advisor on how you can simplify the process. This might mean trading less actively in your taxable brokerage accounts, a move that may help cut down on those pesky 1099s. It may also mean that it’s time to rethink where you’re holding assets that spin off income. Consider that bonds, whose interest is taxed as ordinary income, may be better held in a tax deferred or tax-free account, as opposed to taxable. “Before you invest in something, ask what’s the tax form and when will it come out,” said Valega. “Plenty of people get caught off guard with that.” “If it’s in in your [individual retirement account], maybe it doesn’t matter, but in a taxable account, pay attention because it will,” she added.
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