ShmoopTube

00:00

finance a la shmoop what is ordinary income versus long-term gain income ah

00:08

tax policy it changes like the seasons if the seasons were always mean and [Seasons of the year appear]

00:14

nasty well generally speaking throughout modern US tax history there have been

00:18

two types of taxes those levied on your wages or personal income that you [US tax types appear]

00:23

actively earned usually at a relatively high tax rate and those taxes levied on

00:28

gains from investments or passive income you know like stocks that went up and

00:33

then we're sold for cash or land that was bought cared for appreciated in [Land stamped with sold]

00:37

value and then sold for cash well the two big keys in differentiating these

00:41

concepts revolve around a the type of income that's coming in I heat if you

00:46

hauled bricks to earn the money it's ordinary actively earned income [Bricks land into wheelbarrow]

00:51

plain-vanilla work-related and be that money can be made from investment gains

00:56

and there's a curveball here in that if the gains were realized or the [Man hit by a baseball]

01:00

investment was turned into profits in the form of cash I eat you sold the land

01:04

for cash not in barter for another piece of land and you did it in less than one

01:09

year after buying it well then the tax rate applied will be the ordinary income [Tax rate table appears]

01:14

level the higher level in part because well if you turned it into profits so

01:19

quickly well the government figures it was kind of your job and you were

01:23

working it pretty hard in that less than one year time period and so you actively

01:27

earned the money and to punish you for working hard they tax you at a higher

01:31

rate like the brick hauling ordinary income is earned rather than passive [Bricks falling and dollar signs appear]

01:35

long term investing gains the differences can be massive in a blue

01:39

state the marginal ordinary income rate post Trump hovers somewhere a bit beyond [Blue states appear in US]

01:44

50 percent assuming no incremental city tax piled on top hello Manhattan we're

01:49

looking at you the long-term gain rate hovers around 25 percent and in a red

01:54

state with a no state tech long-term gain hovers around 20 percent and change

01:58

there's Obamacare thrown in there so on and so if you had a gain of a

02:02

million bucks on a security you've held 364 days and you sell it that day while

02:07

you keep a bit less than 500 grand if you wait another day or two before

02:11

selling while you keep more like 750 grand from that million yeah it's a

02:16

delta of a quarter of your entire investment courtesy of qualifying for

02:20

long-term gain treatment rather than short-term so just like the conclusion [A corvette appears]

02:24

of a really good Saturday night you always want to try to go long-term in

02:28

instead of short

Full Transcript