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Finance: What are the Types of Income Tax? 65 Views
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What are the types of income tax? Federal income tax. State income tax. Real estate tax. Value Added Tax (VAT). Some tax is progressive, some tax is regressive. The commonality: they're all bad.
- Social Studies / Finance
- Finance / Financial Responsibility
- College and Career / Personal Finance
- Life Skills / Personal Finance
- Finance / Finance Definitions
- Life Skills / Finance Definitions
- Finance / Personal Finance
- Courses / Finance Concepts
- Subjects / Finance and Economics
- Finance and Economics / Terms and Concepts
- Terms and Concepts / Accounting
- Terms and Concepts / Bonds
- Terms and Concepts / Company Management
- Terms and Concepts / Econ
- Terms and Concepts / Investing
- Terms and Concepts / Managed Funds
- Terms and Concepts / Metrics
- Terms and Concepts / Real Estate
- Terms and Concepts / Retirement
- Terms and Concepts / Stocks
- Terms and Concepts / Tax
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Transcript
- 00:00
finance a la shmoop. what are the types of income tax? well there are many types of
- 00:06
tacks. here are some nice ones .and here are some others. and here are more .wait never
- 00:12
mind. okay. so there really are only two flavours of income tax in America.
- 00:17
ordinary income tax. yep that. and investment tax. in the u.s.
- 00:25
we tax people at different rates on the money they actively learn, like from [scientists work in a lab]
Full Transcript
- 00:30
working at a job. versus money they passively earn like from gains on
- 00:34
investment or inheritance from dead grandparents. well in the interest of not
- 00:39
making you want to vomit or fall asleep we have simplified a ton of things for
- 00:42
the sake of clarity here. the overarching theme in income taxes is that the
- 00:46
government has taken the position that the wealthy or successful or high
- 00:50
earners should be taxed at a higher rate than people who earn less money. and
- 00:55
since the actual numbers change with seemingly every presidential cycle, we're
- 00:59
going to just simplify them here. but if you earned 100 grand last year you'd be
- 01:03
taxed at different rates on the different levels of money you earned.
- 01:07
like you're going to be taxed a percentage on a certain amount of that
- 01:10
hundred grand and then you'll be taxed a different percentage on the rest of it.
- 01:13
so this system is called quote progressive unquote. it's kind of a
- 01:18
political term because the people who voted for it thought it was great. well
- 01:22
on the first $10,000 of earning you might pay zero tax. like you know say
- 01:27
you're a starving artist and the government which doesn't want to tax you [equation]
- 01:30
so you can keep painting more paintings or whatever you did during that ten
- 01:33
grand. from $10,001 to 25 grand you might pay 10% on that piece of it. so that's
- 01:40
ten percent on that next fifteen thousand bucks of earnings or $1,500.
- 01:46
then from twenty-five thousand one to sixty thousand dollars you might pay 20%
- 01:51
so that's a 20% rate on that 35 grand spread right there yeah 60 minus 25 35
- 01:57
in California anyway. so 7 grand in taxes there know how much it more expensive
- 02:02
those later dollars are. then on the sixty thousand one dollars to a hundred
- 02:06
thou you might pay 30 percent or 30 percent tax on that 40 grand oh you'd
- 02:11
have paid 12 grand on that last 40 grand in taxes oh you only keep
- 02:15
28 grand after earning 40. well the total amount you would have paid then is one
- 02:19
less day fifteen hundred plus seven grand plus well grant go a hair over 20
- 02:23
grand. your average tax on that ordinary income [equation]
- 02:27
in for your federal tax would have been twenty point five percent. well things
- 02:31
get way more complex from here many states have a state tax in addition to
- 02:35
the income tax. Wyoming Florida in Texas for example have no state tax. they pay
- 02:41
their state bills from sales taxes and mineral / oil / energy taxes on
- 02:46
corporations, who drill them. California has the highest taxes on ordinary income
- 02:51
and investment income actually. topping out at thirteen point three percent for
- 02:56
the wealthiest earners there. yeah it's a mess doin your taxes and there's a
- 03:00
reason H&R Block is so profitable. well a lot of things beyond your paycheck get
- 03:04
taxed at ordinary income rates as well like rent you collect from renting out
- 03:08
your guest house and short term investment gains like if you paid ten [one woman collects money from the other]
- 03:11
bucks for a share of stock held it less than a year and then flipped it for
- 03:14
fifteen bucks that year well then you'd be taxed as if that $5 a share gain was
- 03:20
ordinary income. okay so thus far we've been covering flavor number one ordinary
- 03:25
income tax. time for the second flavor investments gain taxes but when you
- 03:31
invest in a stock or land or gold or rare coins or art and you hold it for a
- 03:36
year or longer you receive what's called long-term gain tax treatment. that's
- 03:41
cheaper than ordinary income tax taxes oddly long-term gains have historically
- 03:45
been roughly half of ordinary rates well the system is designed to reduce
- 03:49
volatility in the market in which assets are bought and sold by giving a benefit
- 03:54
to investors who hold things longer they tend to marry them rather than have lots
- 03:58
of no one-night stands with their stocks. it's better for everybody. [man frowns at stock drooling next to him in bed]
- 04:03
long-term rates have hovered around 20 percent per year and change so if you
- 04:06
invested a hundred grand into a stock and held it five years and it turned
- 04:10
into 250 grand and then you sold it you'd show a gain of a hundred and fifty
- 04:15
K. well that 150 K is your realized gain. you realized it when you got the cash
- 04:21
wired into your brokerage account so you can tax 20% on the gain
- 04:26
150k and well 150 k times 20 is 30 grand.
- 04:30
so from your original investment which turned into a 250 K pre-tax you'd keep
- 04:35
after-tax 250 K minus that 30 grand tax or 220 grand and note that many
- 04:40
states tax gains on income as well the above is just an example based on
- 04:44
federal rates. well the gist in this video is to be able to distinguish
- 04:48
between ordinary income from sources like your part-time job at the Wendy's
- 04:52
drive-through window or the money you make shoveling old man mather's driveway [man works drive through window]
- 04:55
or that by weekly paycheck you get for selling your soul to Geico. yeah an
- 05:01
investment income which gets long-term gains treatment like flipping an IPO
- 05:05
that gets ordinary income tax treatment because you owned the stock for only a
- 05:10
day or so. that's ordinary income. or a great long-term investment over five
- 05:14
years in a soft drink company that ends up being acquired for big bucks by
- 05:18
Coca-Cola./ or an angel funding round investing in two kids in garage who end
- 05:23
up making a car that actually flies without killing people upon landing.it's
- 05:28
be pretty cool so yeah two totally different flavors and both can leave a [kids smile as their car flies]
- 05:32
bad taste in your mouth.
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