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Welcometo Lesson5,thesecondofthreevideosforourtopicontaxes.

Theresnogettingaroundit: theU.S.Taxcodeisverycomplicated! There isnowayto

makeyouanexpertinonelesson,10lessonsoreven100lessons.Nonethelessinthis

lessonandinlesson6wellpointtoafewprovisionsofthetaxcodethatareofhighest

interestto

most

taxpayers.

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Aswediscussedin thelastlesson,taxratesaredefinedbytaxableincomeandtypeof

taxableunit yourfilingstatus. Thetaxratesareprogressive.Thatmeansthatthegreater

yourtaxableincome,thehigheryourtaxrate.

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Letslookatanexample.Letstakeamarriedcouplewithataxableincomeof$50,000.

(Remember,thatisafterdeductions,exclusions,etc.). Thiscoupleowestaxesatarateof

10%onthefirst$17,400oftheirincome.Thiscomesto$1,740. Nowletsmoveontothe

nexttaxbracket.Then,theyllpay15%onthedifferencebetween$17,400and$50,000.

Thisis15%times$32,800 or$4,920. Thisamountstoatotaltaxbillof$6,660.

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Asifthetaxcodeisnotdifficultenough,differenttypesofincomearetaxedatdifferent

rates.

Thetypical taxrateshownearlieristhetaxrateongeneralincomeandissometimes

referredtoastheearnedincomerate.

Thereareotherratesforothertypesofincome. Generallytheseratesdealwith

investmentincome

ThedividendspaidbyacompanyareeitherordinarydividendorQualifiedDividends.Taxes

onQualifiedDividendsarepaidataspecialflatrate

Theprofitwhenyousellsomethingformorethanyourcalculatedpurchasevalueare

CapitalGains. Theyaresubjecttotheirownspecialratetable.

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Recipientofthegiftpaysnotaxesonthegift

Giverofthegiftmayincurtaxesundertheestateandgifttaxrules

Giftretain

the

basis

of

the

giver

/donor

unless

the

property

was

sold

at

aloss

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Depreciationisthesystembywhichabusinesscanexpensecapitalequipmentasan

ordinarybusinessexpense. Forinstanceifabusinessbuysatruck,itisonlyallowedto

claimtheexpenseassociatedwiththispurchaseovertime. Iftheysellthetruck,thebasis

onthetruckisreducedbytheamounttheytookasabusinessexpense.

Depreciationis

afactor

that

affects capital

gains

income.

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Whenyousellyourhouse, youcanexcludeupto$250,000inprofitfromyourtaxable

incomeifyouaresingle,or$500,000foramarriedcouple.Therearecertainexceptions

aroundthis,sobesuretoreaduponthis.

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In1969,duringanera inwhichmuchwasmadeofthewealthypayinglesstaxesthan

others,Congressenactedaparalleltaxcalculationwithgreatlyreduceddeductionsanda

separatesetoftaxratestoreformtheinequities.

Thiswasinstitutedbeforethehighinflationofthe1970swhenmuchofthetaxcodewas

indexedfor

Inflation.

The

Alternative

Minimum

Tax

was

not

indexed

and

now

many

middle

classfamiliesarepotentiallysubjecttothisburden. ForyearsnowtheCongresshas

enactedannualpatchestotheoriginalprovisionsofthelaw.

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ThedeductibilityofhomemortgageinterestisafavoriteofAmericans. Aswithallthings

taxrelated,itisnotas simpleasitsoundsacrossthebackfence. Theinterestthatis

deductibleisAcquisitionandImprovementdebtplus$100,000.

Thusifyouhadpaiddownyourmortgageto$50,000 andyouborrowed$125,000topay

offyour

credit

card

and

car

loans,

the

interest

on

$25,000

would

not

be

deductible.

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Givenallthemovingpiecesinthetaxcode,itislittlewonderthattherearewaysyoucan

reduceyoutaxbill.ThesefiveDswillhelpyoulookforideas.Letstakethemonebyone.

Deductions: Takeallthedeductionsandcreditsyoucanreliablytake. Keepthereceipts

thatjustifythem. Thisisespeciallytrueifyourunsomesortofbusinessyourself.

Diversion:Takestepstomakeinvestmentsfromwhichthereturnswillescape

taxationorbetaxedatareducedrate.SomeexamplesareStudent529Plans,

HealthSavingsAccounts,andRothIRAs.

Deferral: Takestepstodefertaxesuntilfutureyears,perhapsthroughanIRAor

EmployerRetirementPlan.

Deflection:Transferassetstosomeoneinalowertaxbracket.Transferringtaxable

collegesavingstoyourchildmaybeagoodchoice.

Diminution:Thisisabitofacatchallcategoryofideasthatyoumaypickupinthe

readingsforthisweek.

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TheU.S. taxcodeismassivelycomplex,andwehavereallyonlyscratchedthesurface.In

thenextlessonwewilltalkaboutpreparingtofileyourtaxesandhowtogethelp.