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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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bad taste in your mouth.

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