MODLAB
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Commodity taxes - A tax on goods or services
1. Who pays the tax does not depend on who writes the check to the government
2. Who pays the tax does depend on the relative elasticities of demand and supply
3. Commodity taxation raises revenue and creates lost gains from trade
It does not matter where the legal incidence falls, because it will result in the same
outcome.
A tax on sellers causes what sellers receive to decrease, and buyers pay more.
A tax on buyers causes their willingness to buy for the same price, and sellers will
receive less.
The more elastic side of the market pays a smaller share of the tax, while the less elastic
side pays more of the tax.
Elasticity - The ability to escape the tax
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MR ZIRKLE VIDEOS
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As income goes up, the higher the tax rate is required. Taxes come from FICA and the
federal government, however the FICA part can be cut if it is rental or interest income.
The Commonwealth of Virginia also has 5%.
If that comes from profit from long-term (more than a year) sale of an asset, then it
counts as capital gain and the tax is usually 15%, but 20% if higher income. Plus an
additional 5% from the commonwealth of Virginia.
Minimize taxes!
1. Save using your company’s retirement account (defer taxes until retirement)
2. Match investment gains and losses by looking at assets before they become
long-term
3. Estate Planning
Employer’s Withholding Certificate or Form W-4 - Important for employers to deduct the
amount of money for federal taxes. Has five steps. First part asks for a name and
address. Second part is social security. Third part asks for marital status and position of
household. Steps 2-4 asks for extra tax to be withheld or if there are children.
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BOOK
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Deductions - Expenses that reduce taxable income
Average rates - The total amount of income taken away from taxes
Marginal tax rates - The percentage of the last dollar you earn that goes towards taxes
How to calculate tax: Find tax bracket for taxable income, find base value and subtract
the minimum income from taxable income and use the federal tax percent on that to get
final tax.
Effective tax rate - The tax rate you pay when all income tax rates are combined.
Consider federal, state, city, and FICA taxes.
Capital asset - An asset you own, except for certain business assets, including stocks,
bonds, and real estate
Capital gains - What you make if you sell a capital asset for profit
Capital gains tax - The tax you pay on capital gains
Capital losses can offset capital gains by deducting from income. If you hold the asset
for more than 12 months, it qualifies as long-term and is taxed at a lower rate.
For most homeowners, the sale of a house is not taxed if under 500k and the owners
lived there two of the five years of the sale.
Four filing statuses:
- Single
- Married jointly or surviving spouse: If you are filing both of your incomes together
combining income and deductions into a single return. If your spouse dies, you
can qualify for this status for up to 2 years if you have a child
- Married filing separately: Also have the choice to be filing separately
- Head of household: Unmarried but has at least one child or relative living with
them.
Tax increase caused by inflation is called bracket creep.
Withholding from wages - A method of collecting taxes which involves gradually taking
out money from wages
FICA usually collects 7.65% in taxes, 6.20% for social security, and 1.45% for medicare, a
government health-care program.
If you are self-employed, you have to pay both the employer and the employee portions
of FICA, for a total rate of 15.3 percent. However half of your contribution is tax
deductible.
Until 2018, the state and local tax deduction allowed taxpayers to deduct all their state
and local taxes. But a new law starting in 2018 made the maximum SALT deduction 10k.
Excise taxes - Taxes imposed on certain purchases, often aimed at reducing
consumption on the item being taxed
Property taxes - Most local taxes take the form of property taxes on real estate or
automobiles, depends on assessed worth
Sales tax - Some states and localities also have a tax on certain purchases, which can
go up to 9.25 (Nashville), and are fixed (same for everyone)
Gift and estate taxes - When you transfer wealth to another person
In calculating taxes here are steps:
Step 1. Determine gross or total income, which is sum of all taxable income from all
sources
Step 2. Calculating Adjusted Growth Income - IRS allows you to reduce taxable income
when you contribute to certain retirement plans as encouragement to do so. Other
adjustments include interest paid on student loans and health savings accounts.
Step 3. Subtracting Deductions - From the AGI, subtract deductions you qualify for.
Itemized deductions are when you determine and document deductible expenses and the
IRS decides you shouldn’t have to pay income tax for certain expenses. Standard
deduction is the government’s best estimate of what the average person would be able to
deduct by itemizing. Choose between the two.
Step 4. Calculating taxable income and from there your base income tax - Determine the
tax amount from the tax table, and if the income is over 100k, then you have to manually
calculate it
Step 5. Subtracting your credits and determining your taxes due - Tax credits reduce the
amount of money you owe in a dollar-for-dollar manner. For instance, child tax credit can
remove up to 2,000$ per child.
There are two tax forms to choose from, 1040 and 1040-SR. 1040-SR are for taxpayers
who are over 65 before the tax year starts. Wages are reported on an W-9 form. A 1099
form reports interests and dividends.
Schedule - An attachment on your tax form which you provide information regarding
income and expenses that flow through that tax form.
If you are unable to file on time, you must request an extension form and file form 4868.
Use Form 1040-X to amend returns
Being audited is to be examined by the IRS.
Five strategies to minimize payments to Uncle Sam:
◆ Maximize deductions.
◆ Look to capital gains and dividend income.
◆ Shift income to family members in lower tax brackets.
◆ Receive tax-exempt income.
◆ Defer taxes to the future.