I thought with all the discussions that always surround politics and taxes, that maybe a simple example of taxes by type of income might be informative.
Some Basics of Taxes
There are a couple of types of tax that I am going to illustrate. Ordinary and Capital Gains.
- Ordinary income tax is the kind that has the brackets we are all familiar with. They start at Zero and the current maximum ordinary rate for Individuals is 37%. This is important to remember…. When you have income that takes you from one bracket to the next one…ONLY THE INCOME THAT IS ABOVE THE LAST BRACKET IS TAXED AT THE NEW RATE! Any income that falls into the 10% bracket stays at that rate. The income that falls into the next bracket pays the higher rate on only the income that exceeds the previous bracket. So everyone has a blended rate. A combination of all the various brackets they had income fall into.
- Capital Gains tax has one rate for Short-term Sales and another for Long-Term Sales. Short-term gains are currently taxed at ordinary rates. Long term gains are taxed at 20% for any investments sold after having owned them for a full year. So if all you have is Long-Term Capital Gains income, you will pay a flat rate of 20% plus the Net Investment Income Tax for taxpayers over $200,000 for Single taxpayers and $250,000 for married filing joint taxpayers. This rate is 3.8%. So if you make more than $200,000/$250,000 but only have Capital Gains Income, your rate will never be more than 23.8%. Not the 37% that taxpayers with ordinary income will pay at the highest bracket.
- The “Poor” who pay no taxes have taxable income below $19.400
- The Super Wealthy can also pay no income tax for various reasons, so if 45% of Americans pay no federal income tax, believe me that is NOT just the “Poor”.
- The tax numbers below came directly from my tax software with just that one type of income reported and no other deductions or income of any sort. All for Single taxpayer taking the standard deduction.
Just an example of the taxes various kinds of income will pay so that when you think about it or discuss it, you have information to work with.
