Marginal Tax

finance a la shmoop. what are the types of income tax? well there are many types of

tacks. here are some nice ones .and here are some others. and here are more .wait never

mind. okay. so there really are only two flavours of income tax in America.

ordinary income tax. yep that. and investment tax. in the u.s.

we tax people at different rates on the money they actively learn, like from [scientists work in a lab]

working at a job. versus money they passively earn like from gains on

investment or inheritance from dead grandparents. well in the interest of not

making you want to vomit or fall asleep we have simplified a ton of things for

the sake of clarity here. the overarching theme in income taxes is that the

government has taken the position that the wealthy or successful or high

earners should be taxed at a higher rate than people who earn less money. and

since the actual numbers change with seemingly every presidential cycle, we're

going to just simplify them here. but if you earned 100 grand last year you'd be

taxed at different rates on the different levels of money you earned.

like you're going to be taxed a percentage on a certain amount of that

hundred grand and then you'll be taxed a different percentage on the rest of it.

so this system is called quote progressive unquote. it's kind of a

political term because the people who voted for it thought it was great. well

on the first $10,000 of earning you might pay zero tax. like you know say

you're a starving artist and the government which doesn't want to tax you [equation]

so you can keep painting more paintings or whatever you did during that ten

grand. from $10,001 to 25 grand you might pay 10% on that piece of it. so that's

ten percent on that next fifteen thousand bucks of earnings or $1,500.

then from twenty-five thousand one to sixty thousand dollars you might pay 20%

so that's a 20% rate on that 35 grand spread right there yeah 60 minus 25 35

in California anyway. so 7 grand in taxes there know how much it more expensive

those later dollars are. then on the sixty thousand one dollars to a hundred

thou you might pay 30 percent or 30 percent tax on that 40 grand oh you'd

have paid 12 grand on that last 40 grand in taxes oh you only keep

28 grand after earning 40. well the total amount you would have paid then is one

less day fifteen hundred plus seven grand plus well grant go a hair over 20

grand. your average tax on that ordinary income [equation]

in for your federal tax would have been twenty point five percent. well things

get way more complex from here many states have a state tax in addition to

the income tax. Wyoming Florida in Texas for example have no state tax. they pay

their state bills from sales taxes and mineral / oil / energy taxes on

corporations, who drill them. California has the highest taxes on ordinary income

and investment income actually. topping out at thirteen point three percent for

the wealthiest earners there. yeah it's a mess doin your taxes and there's a

reason H&R Block is so profitable. well a lot of things beyond your paycheck get

taxed at ordinary income rates as well like rent you collect from renting out

your guest house and short term investment gains like if you paid ten [one woman collects money from the other]

bucks for a share of stock held it less than a year and then flipped it for

fifteen bucks that year well then you'd be taxed as if that $5 a share gain was

ordinary income. okay so thus far we've been covering flavor number one ordinary

income tax. time for the second flavor investments gain taxes but when you

invest in a stock or land or gold or rare coins or art and you hold it for a

year or longer you receive what's called long-term gain tax treatment. that's

cheaper than ordinary income tax taxes oddly long-term gains have historically

been roughly half of ordinary rates well the system is designed to reduce

volatility in the market in which assets are bought and sold by giving a benefit

to investors who hold things longer they tend to marry them rather than have lots

of no one-night stands with their stocks. it's better for everybody. [man frowns at stock drooling next to him in bed]

long-term rates have hovered around 20 percent per year and change so if you

invested a hundred grand into a stock and held it five years and it turned

into 250 grand and then you sold it you'd show a gain of a hundred and fifty

K. well that 150 K is your realized gain. you realized it when you got the cash

wired into your brokerage account so you can tax 20% on the gain

150k and well 150 k times 20 is 30 grand.

so from your original investment which turned into a 250 K pre-tax you'd keep

after-tax 250 K minus that 30 grand tax or 220 grand and note that many

states tax gains on income as well the above is just an example based on

federal rates. well the gist in this video is to be able to distinguish

between ordinary income from sources like your part-time job at the Wendy's

drive-through window or the money you make shoveling old man mather's driveway [man works drive through window]

or that by weekly paycheck you get for selling your soul to Geico. yeah an

investment income which gets long-term gains treatment like flipping an IPO

that gets ordinary income tax treatment because you owned the stock for only a

day or so. that's ordinary income. or a great long-term investment over five

years in a soft drink company that ends up being acquired for big bucks by

Coca-Cola./ or an angel funding round investing in two kids in garage who end

up making a car that actually flies without killing people upon landing.it's

be pretty cool so yeah two totally different flavors and both can leave a [kids smile as their car flies]

bad taste in your mouth.