Welcometo Lesson5,thesecondofthreevideosforourtopicontaxes. Theresnogettingaroundit: theU.S.Taxcodeisverycomplicated!There isnowayto makeyouanexpertinonelesson,10lessonsoreven100lessons.Nonethelessinthis lessonandinlesson6wellpointtoafewprovisionsofthetaxcodethatareofhighest interesttomosttaxpayers.

Aswediscussedin thelastlesson,taxratesaredefinedbytaxableincomeandtypeof taxableunit yourfilingstatus.Thetaxratesareprogressive.Thatmeansthatthegreater yourtaxableincome,thehigheryourtaxrate.

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.

Asifthetaxcodeisnotdifficultenough,differenttypesofincomearetaxedatdifferent rates. Thetypical taxrateshownearlieristhetaxrateongeneralincomeandissometimes referredtoastheearnedincomerate. Thereareotherratesforothertypesofincome.Generallytheseratesdealwith investmentincome ThedividendspaidbyacompanyareeitherordinarydividendorQualifiedDividends.Taxes onQualifiedDividendsarepaidataspecialflatrate Theprofitwhenyousellsomethingformorethanyourcalculatedpurchasevalueare CapitalGains.Theyaresubjecttotheirownspecialratetable.

Recipientofthegiftpaysnotaxesonthegift Giverofthegiftmayincurtaxesundertheestateandgifttaxrules Giftretainthebasisofthegiver/donorunlessthepropertywassoldataloss

Depreciationisthesystembywhichabusinesscanexpensecapitalequipmentasan ordinarybusinessexpense.Forinstanceifabusinessbuysatruck,itisonlyallowedto claimtheexpenseassociatedwiththispurchaseovertime.Iftheysellthetruck,thebasis onthetruckisreducedbytheamounttheytookasabusinessexpense. Depreciationisafactorthataffects capitalgainsincome.

Whenyousellyourhouse, youcanexcludeupto$250,000inprofitfromyourtaxable incomeifyouaresingle,or$500,000foramarriedcouple.Therearecertainexceptions aroundthis,sobesuretoreaduponthis.

In1969,duringanera inwhichmuchwasmadeofthewealthypayinglesstaxesthan others,Congressenactedaparalleltaxcalculationwithgreatlyreduceddeductionsanda separatesetoftaxratestoreformtheinequities. Thiswasinstitutedbeforethehighinflationofthe1970swhenmuchofthetaxcodewas indexedforInflation.TheAlternativeMinimumTaxwasnotindexedandnowmanymiddle classfamiliesarepotentiallysubjecttothisburden.ForyearsnowtheCongresshas enactedannualpatchestotheoriginalprovisionsofthelaw.

ThedeductibilityofhomemortgageinterestisafavoriteofAmericans. Aswithallthings taxrelated,itisnotas simpleasitsoundsacrossthebackfence.Theinterestthatis deductibleisAcquisitionandImprovementdebtplus$100,000. Thusifyouhadpaiddownyourmortgageto$50,000andyouborrowed$125,000topay offyourcreditcardandcarloans,theintereston$25,000wouldnotbedeductible.

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.

10

TheU.S. taxcodeismassivelycomplex,andwehavereallyonlyscratchedthesurface.In thenextlessonwewilltalkaboutpreparingtofileyourtaxesandhowtogethelp.

11