San Diego Attorneys - Managing Tax Avoidance Strategies
There are numerous types of income for the purposes of calculating taxes owed by individuals and businesses
. Income can be divided in a number of ways, however.
First, income can be divided up into ordinary income and capital gains. Ordinary income includes compensation services rendered, including wages and salaries, business profit, dividends from stock shares, and interest income from invested funds while capital gain generally comes from the sale of investment property.
Congress Provision for Long-term Investments
The United States Congress has consistently maintained a preference for long-term investment. The tax rate applies to capital gains is generally lower than the tax rate applied to ordinary income. Only long-term capital gains, however, receive preferential treatment. Short-term capital gains, including gains from property that has been held for less than one year, are usually taxed at the same rate as ordinary income. Various distinctions are also made within each category of income type, however, and this is what tends to make the system particularly complicated.
Qualified dividends were initially taxed at the rate of ordinary income while non-qualified dividends still are not. Qualifying dividends apply to long-term capital gain rates until 2011 under the Jobs and Growth Tax Relief Reconciliation Act of 2003.
Among long-term capital gains, gains on certain real estate, collectibles, and small business stock all have a separate tax rates. Rules for offsetting capital losses with gains are also particular complex and allow for additional confusion and complications, although when most people refer to their "tax rate", they are referencing their marginal tax rate for ordinary income.
Applying for Tax Exemption
Distinction in types of income extends to whether income is acquired from passive activities or non-passive activities. The goal of this distinction is to cut back on the available shelters employed by taxpayers not directly involved with an activity other than as an investor. Each year, taxpayers may apply personal exemption depending on their filing status. In 2009, the personal exemption amounted to $3,650 per person.
By claiming deductions, an individual may legally reduce their individual's tax liability by a rate equal to the marginal tax rate of their particular tax bracket, with a corresponding reduction in returns as the individual crosses in to a lower tax bracket.
This article is not made for providing legal advice.
by: George Hill
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