Wanna get a mutual fund that normally sells with a load or a commission? Invest a million bucks. Hold it a year or more (usually). And it's yours, no load.
How does this "volume deal" magic happen? Does the broker just donate her commission in that situation?
Um, no. Brokers have boats to buy, mortgages to pay, alimony payment lawsuits to defend. Instead, in the case of a million dollar investment, the people who manage the money essentially fund the broker's commission.
Like...let's say that volume deal commission would be 1.5%. Well, the fund managers then would take 1.5% out of the million bucks they're managing that year (for a fee of, say, 1% a year), and pay that broker quarterly to make up the $15k they've earned in commission. Note that the fund managers collect "only" $10k in management fees that year for managing that money. If the buyer of that million bucks' worth of mutual fund then sells after a year, the money managers usually eat that $5k of loss.
But that event is relatively rare. Most mutual funds are bought to be held a long time, and the odds that the investor holds 10 years or longer are usually way higher than that they sell after a year. (And if they sell before a year, usually they owe some pro rata amount of commission for having jerked everyone around.) But on a 10-year hold, assuming that million bucks doubles in that time period, the fees collectd should vastly dwarf the $15k of commission paid to the kindly, loving broker.
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Finance: What is the Difference Between ...45 Views
finance a la shmoop -what is a tax deduction ah taxes love them hate them
you can't leave them. but you can lower them legally by being you know
thoughtful about how you spend your earnings. all right how do we do this?
well let's start with the largest tax deduction in America the home mortgage. [man stands in front of house]
and you use a dentist who makes a hundred fifty grand a year for putting
your fingers in wet mouths. well remember, that for individuals versus corporations [man sticks finger into open mouth]
we pay a graduated or quote progressive unquote tax rate - like almost nothing on
the first 15 grand we earned than about 10 percent from 15 to 30 grand, and then
about 20 percent from 30 to 60 grand and so on. that's progressive. so on the last
20 grand of earnings you make well you might pay say 40 percent in taxes and [chart shown]
yeah we know the numbers aren't exact we're just illustrating a point here. you
have a mortgage of $300,000 on a home you bought for $400,000 right so you put
a hundred grand down and borrowed three hundred .the mortgage costs you 6% per
year in interest, or eighteen thousand dollars to rent that three hundred
thousand. before you owned the home the IRS thought of you as a hundred fifty
grand a year earner, but a hundred percent of the interest on the home is fully [the number 100 on screen]
tax-deductible .so what about that last 20 grand ie the money you earned from 130K to 150 K? well as far as the IRS is concerned, now that you have a
home, you get taxed as if you earned just 132 grand,
hundred fifty K you actually earned .why? because that eighteen thousand dollars
in interest comes right off the top of your earnings. see? there's the math right
there. 150 minus 132 in taxable earnings. it's as if you didn't earn that money
ever [piggy bank shaken. confetti falls out]
all right well if you'd had no deductions on that last $20,000 of
earnings you'd have paid 40 percent or $8,000 in taxes. but now on that last
$20,000 thanks to your mortgage deduction, well you only have taxable
income of $2,000 and yes you pay 40 percent on that 2,000 or 800 bucks. and
you mumble though thank you government for largely splitting the cost of my
mortgage with me. the American Dream is alive and well yeah that's what you said. [ man in suit stands in fancy room]
okay. and thank you Jay. there are other deductions beyond home mortgages of
course but well you give the gist here of how they work. from a taxpayers
perspective deductions like those from your home mortgages are a good thing.
common personal deductions also include things like prepaid health care costs,
and the cost of feeding quote dependent unquote children. ie those noisy things [kid jumps on a bed]
sleeping in your spare bedrooms until they're 18. okay so those are personal
deductions. things that individual citizens take. but what if you're a
corporation? well in a way it's kind of easier. think of most corporations as
having a flat 30% tax from the first dollar they make just to keep things
simple. participation trophy company Inc made a hundred million dollars last year
and paid 30 million in taxes. they netted 70 million after tax. the company really
needs a new trophy smelting machine because with so much demand for [metal melts in a fire]
participation trophies of late while the old one is running dull with mediocrity.
the company spends 40 million bucks on the new machine knowing that it will be
worthless in 10 years either because it wears out or because the country gets
real. or you know simply remembers to you know have a nice day, yeah participation [smiley face]
trophy land. well they depreciate 40 million dollars in
equal parts of 4 million bucks each year over 10 years so that in the next year
when they again earned a hundred million dollars well they now get to deduct 4
million bucks in depreciation from their smelting machine against their hundred
million dollars in earnings. so again as far as the IRS is concerned they didn't
really earn a hundred million dollars even though they did. they earned quote
only unquote 96 million. and yes they still pay their 30 percent tax only now [equation on screen]
instead of paying it on a hundred million bucks it's paid on 96 million of
earnings or 0.3 times ninety six or twenty eight point eight million in
taxes. they deducted from their taxes the four million bucks ,expected value
decline from their smelting machine. right it goes down four million a year
in value from the 40 they paid. and they received essentially a credit on their
taxes of 1.2 million dollars. so instead of that years depreciation costing the [equations shown]
company four million bucks well it really cost them more like 2.8 million
if you ignore a bunch of other things like the original capital cost of the
machine and what else they might have done with that money other than the you
know buy a smelting machine. think think corporate jet yeah those G-6 are [furnace shown]
surprisingly tasteful.
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