Unit 15: Tax Considerations Flashcards
marginal tax rate
-an individual’s highest paid rate for taxes.
-also referred to as their “next dollar” or “last dollar received”.
two factors determining tax bill
-amount of income
-filing status (marital status on last day of year).
Examples of Regressive tax
Sales, Excise, Payroll, Property, and Gasoline
-they’re all at the same rate, so regress as income increases.
Examples of Progressive tax
Estate, Gift, and income taxes
-percentage increases as income/amount increases.
Earned income
Salary, Bonuses, tips, or any other income derived from active participation in a business.
-Alimony received from a divorce prior to 2019
Passive Income (losses)
Rental Property, Limited Partnerships, and enterprises in which the individual does not actively participate.
-Passive losses are only deducted from passive income.
-Net income is added to Earned income
Portfolio Income
Dividends, Interest, net capital gains.
-taxed for the year it is earned/realized.
-Assume Div is qualified and taxed at 15%
TIPS taxation
Annual interest and annual principal increase taxed as ordinary income.
Foreign Issues
Typically have 15% withholding, can be used as credit on the interest.
Dividend reinvestment
Dividends are taxed no matter if they are reinvested, so the cost basis increases so that the shares are not taxed again when sold.
Retirement plan distributions
taxed at ordinary income, and 10% fee if withdrawn prior to 59.5
Margin Interest
tax deductible, unless from municipal securities
Effective Tax Rate
the overall weighted average rate paid.
Capital gain (loss)
resulting from a sale of an asset
-if under 12 month, short term gain taxed as ordinary income
-if over 12 months, long term gain taxed at 15%
Accounting method
default to FIFO, but can also be share identification or average (average preferred for mutual funds)
