 Income tax 2022 2023 tax type or categories? Let's do some wealth preservation with tax preparation. There are many different types of taxes many different ways to tax and throughout human history governments have applied just about every general category of taxation that we know about and therefore with regards to tax there's nothing really new under the sun at this point in time we're not coming up with grand new tax schemes at this point but rather we're basically just tweaking adjusting tax schemes that we have seen throughout history this course is focused on the united states income tax the primary tax system funding the federal government it's an income tax system therefore the taxes being applied as we earn the money we can compare that to another system often used in democratic republics at this point in time and that's going to be the sales or usage tax system where the taxes then being applied when a purchase is being made so because those are kind of like the primary tax systems used in democratic republics it's useful to try to categorize the characteristics of those primary taxes support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a youtube page we also include added resources such as excel practice problems pdf files and more like quick books backup files when applicable so once again click the link below for a free month membership to our website and all the content on it systems now in the united states we have the federal income tax system that blankets the whole country and then we have the states which have the sovereignty to choose their own tax systems many states mirror the federal income tax system so therefore the states will have a similar income tax system and we can apply many of the rules on the federal tax system to the state because they're going to be mirroring the federal tax system generally however some states might deviate from that and be using more of a sales tax or usage tax a type of system in order to fund the state needs so in that case of course people would have still to pay the federal income tax and deal with an income tax system and then you've got a state tax that's going to be applied on the local level one of the great things about the united states is the ability to have the states to be sovereign to do their own kind of taxation on a local level so that we can do some experimentation we can we can see about how are those states doing uh is the taxation part of the justification or reasons for any kind of differentiations between states and those are the kind of like testing grounds so as we think about different types of taxes we could try to categorize them in terminology that you will often hear are a flat or proportional type of tax a progressive tax and a regressive tax so these are terms that often come up whenever you see someone that's going to change the tax law so we might be talking about something that we already have a federal income tax system and they're trying to put a new law in it to do something or the other whatever they're trying to do and you will start to hear this language such as well they're trying to flatten out the tax code or they're making the tax more progressive or less progressive or the tax code is being regressive or if you're trying to compare a sales tax or usage tax system to an income tax system people will often use these terms now again whenever you hear these kind of debates about taxation then you've got to be careful because people are going to try to use absolute terminology when usually things are much more complex and nuanced than to use that absolute terminology so when you hear like a flat tax people are often thinking that you have just one tax rate so like you like you give 10 to charity is a gent like a gent that's kind of like a flat tax if you were to apply that rule if you were going to say I'm just going to say 10 is going to be coming out of your income that's a flat tax if we have a progressive tax that means that we generally have a tiered tax system so people wealthier people generally are going to be taxed more in a progressive kind of tax system so in the United States we're you know quite proud often people are proud of the progressive tax system because it's taxing people more on the higher income side of things and note that again there's debate already on that because the flat tax also taxes people more as people's income goes up because 10% of 100,000 is more than 10% of 10,000 but with a progressive tax now you've got a tiered structure where the rates are actually going up as the dollar amount goes up but note that these two aren't necessarily absolute differences it's not like you could say well you have a flat tax or a progressive tax we have we have a progressive tax because we have multiple tiers but you can imagine things being more or less progressive meaning do you have more tiers more layers of taxation or is the top layer of tax really high if like if you're taxing someone that makes a lot of money like 100 at the top level you could say that would be more progressive or less or less or less flat so you can use this terminology to kind of not be just a static thing but basically more or less and then regressive is often a term that's going to be used to kind of downplay a tax so a politician that doesn't like whatever tax policy that's being applied is going to call the tax policy regressive which would indicate that the people on the low end side of things are going to be bearing more of the brunt of the taxes now oftentimes all these terms are thrown around with very little nuance and and therefore if you really want to see the whole picture you've got to dig into it a little bit more than what is actually presented oftentimes so it's useful to know these terms so a flat or proportional tax tax rate remains the same over income levels so social security for example you can kind of think of as a flat type of tax so in other words a flat tax if you were to apply it on an income tax system would be say you're going to tax everyone 10% or you're going to tax everyone 15% and if you earn 100,000 then you tax the same rate you'll be paying more because you're applying that 10% rate to 100,000 versus someone that earns 10,000 it's going to be paying a lot less taxes but you're not actually changing the rate now the benefits of a flat tax are that it's going to be quite simple to calculate and oftentimes when you're looking at a business or in an economy simplicity is actually very important because you want to be able to project how much taxes you're going to pay because that's going to be a cost to your household that's going to be a cost of doing business and if it becomes very complex to know what that cost is that adds what we call uncertainty into the equation both on the household level and on the business level which makes it difficult to plan and it could be a dampening effect have a dampening effect on you know economic growth and so on so in the United States we have a social security which is has a kind of a flat tax system this isn't the income tax this is what's called the payroll tax system where we're paying into social security and then we're gonna we're gonna possibly get a benefit uh at at the retirement age of of from social security so this social security is kind of linked into the income taxes in some ways because the it's if you have the w2s they're dealing with social security and so it's reported on the w2s and but if you don't if you have your own business then you're self-employed so we'll have to deal with the social security stuff uh in that instance when we're thinking about income taxes but in any case you could see that if the rate was 6.2 percent 40 000 times 6.2 percent is 2400 and 80 if someone earned 100 000 times 6.2 percent they would be paying the 6200 that's basically a flat tax the benefits of a flat tax is it's easy to make projections to budget to forecast into the future so for example if you're currently earning 40 000 dollars and you think next year you're going to earn 100 000 dollars and you're trying to say well how much tax am i going to pay then well if the rate is the same it's a pretty easy calculation to make now note that the social security isn't exactly a flat tax there's some caveats some deviations from basically a pure flat tax type of system which is a point we need to make here and with every type of tax we're talking about or every tax law or change that we're going to be putting in place or talking about because oftentimes once again these terms are throwing around as if they're absolute terms this is a flat tax this is a progressive tax but when what happens in actuality when a tax is put into place and when changes happen to the law they start off with something that's quite simple such as a flat or progressive structure and then they make deviations to it which may make it more or less flat more or less progressive or have some other complication that usually complicates the system in some way shape or form with regards to the social security it's structured a little bit differently because it's not going into like the general fund for the federal government to pay the general needs of the government usually the military is the primary need for the federal government side of things but rather it's going into a fund that's going to be paying out social social security benefits and the idea or concept of social security has kind of changed over time when it was first put into place many people thought of it more as a welfare type of program in that it's there to support people who live past their life expectancy and therefore aren't able to save enough money for retirement because in part people are living longer for example but more and more it's being thought of like as a government kind of retirement program because we're putting a whole lot of money into the social security and we're expecting for it to be paid out to everyone that put the money in to the social security so kind of the the idea of the social security what it's doing what its role is I think has changed a bit over time so and there's and with regards to social security on the taxation there's a cap in terms of if you earn more than a certain level of social security which goes up every year with inflation we'll talk about more in future presentations then you don't pay any more tax after that point which would be odd if it was your primary like income or your primary funding of the government type of tax but the reason that kind of makes sense is that the benefits that you're getting in retirement are going to be based on how much money you paid into the system so if you earn more money you're paying more money into the system you would expect then if we're thinking about this as a government funded retirement kind of system you get more money back but obviously that they're trying to they're trying to taper off so that people that are more well off don't get as much of a benefit so if your income goes over a certain threshold you're not going to get any more benefit when the benefits come out in retirement age and that's kind of the rationale to say well you shouldn't be paying you know more money in at that point in time so we'll get into more debates on on the social security a little bit more and we'll deal with that when we get into self-employment tax and stuff but that's the general idea the next tax category is a progressive tax where taxes are calculated using multiple tax rates that increase with the tax base so our federal income tax system is indeed a progressive tax however again we want to be careful of thinking about those two terms of polar opposites a progressive tax and a flat tax because oftentimes when we're making changes to the tax law we can argue that those changes are flattening the tax or making the tax more or less progressive so let's get into that a little bit more detailed by just getting a general conceptual idea of the progressive tax so as many people often know we can see that the tax rates are going to go up as the income goes up now this looks fairly basic but it actually gets quite complex in terms of the calculations and also quite therefore complex in terms of making budgets and forecasts into the future so we have our income categorization over here so if it's not over 11 000 then we have a rate of 10 percent of the taxable income now when we apply this 11 000 we got to think about where that's going to be applied in terms of the tax formula that's going to be generally the taxable income so that complicates things a bit too it's because we got deductions that are going to be involved to get to like the taxable income which is kind of like net income and then we have credits that are going to complicate things as well but when we're just thinking about applying the tax rate we've got the 11 000 10 percent and then if it's over 11 000 but not over 44 7 25 we have the calculation of 1 000 100 plus 12 percent of the excess over the 11 000 so what in the world does that mean well that means that we're not taxing the entire amount if you earn something between 11 000 or your taxable income between 11 000 and 44 7 25 let's say you earned 44 7 25 we're not going to tax just the 44 7 25 at the 12 percent because we're going to tax that first 11 000 at 10 percent so you've got this layered kind of system so i'm going to say okay how would that how would i calculate what does that mean well if i earned exactly 44 7 25 it would be something like this 44 7 25 minus the 11 000 that's going to be taxed at the 10 percent minus the 11 000 that means that the 33 7 25 of the 44 7 25 is taxed at times the 12 percent that's 4047 plus the 11 100 10 percent of the 11 000 plus the 11 100 so hold on a second let me do that again 44 7 25 minus the 11 000 times point one two is that plus the 11 00 and that's going to be the 5 147 which you can see is the next layer down here so here we have if you make over 44 7 25 but not over 95 3 75 so you're somewhere in between here you've got a 22 percent rate that 22 percent is not going to be applied at your full taxable income if let's say it was 95 3 75 but rather it's only going to be for the amount that is above the prior threshold so now you've got some tax or some earnings taxed at 22 percent some taxed at 12 percent some taxed at 10 percent so if you were to calculate that manually in a calculator you're saying well hey that's getting a little complex and then if it goes up to over 95 3 75 but not over 182 100 so that means anything in between here is now taxed at the top tax rate of 24 percent and some of your prior income is taxed at 22 some of that is taxed at 12 some of the prior income is taxed at 10 so now you're applying one two three four tax rates to the one income and obviously we could see how this increases over time so that means that as your income goes up you are being subject to a higher tax rate up to the 37 percent and notice also that this is for a single filer so this tables will change and we'll talk more about them in the future when you get to like a married a married versus single and so on but that's the general that's the general idea of it and you could see that it can get kind of complex if you were trying to calculate this by hand so using a table structure like this can make it a little bit easier and then we have other tables and obviously tax software that makes it easier to actually calculate the tax but the main point we got to make here also is that when you hear people say that if I earn any more money that's going to push me into a higher tax bracket there's sometimes you hear a misconception of that so for example if if you were being taxed at at the 44 12 percent is your highest tax bracket and you're saying I don't want to earn one dollar over 44 725 because if I earn 44 726 and then I'm going to be taxed at 22 percent well that's not that's not the case that what's going to happen is that one dollar that you earned is going to be taxed at the 22 percent so it's still it's still a disincentive to earn more money because you're going to be taxed at higher rates but it's not like it's not like all of your income is suddenly taxed at 22 percent if you go over a certain threshold and that's often kind of a misconception but even though taking that into account there is of course still a disincentive to earn more over time because if the government is taking 37 percent of your earnings then you're less likely or less motivated to earn than if they were taking you know only 10 percent of your earnings so that's the general idea of it now to actually calculate this obviously we're basically dependent on either tax tables that are provided to us or we're dependent on the tax software so that can be quite complicated to calculate many people argue well what's the problem with that because I have tax software so it's easy I can calculate it no problem but the other problem with it of course is projecting into the future so if you're trying to say like I earned I earned 40 000 this year and next year I think I'm going to earn 100 000 you can't just you can't just look at your tax rate and say okay well what is that going to mean that I'm going to owe on federal income taxes because now you have to apply this progressive tax structure and try to then project what you're going to earn and of course this project this progressive tax tables change every year as well so you don't know exactly what the progressive tax table will be and obviously this is just one component of actually calculating the tax because we're going to have deductions we have to deal with and we're going to have tax credits and stuff that we'll have to deal with which also also feed into the picture so it actually gets quite complex quite quickly it and you can say well after the fact it's not that difficult to figure out what you what your taxes are after you've earned it but you're supposed to calculate the taxes as you're earning it right which makes it a little bit more difficult because for example if I started a new business and I earned 11 000 dollars in the first quarter or something like that I could say okay how much do I owe the government I want to give them their share well you can't give them 12 percent because you're not going to earn only 11 000 dollars you got to project how much you're going to earn over the year which maybe you have no idea but you have to project that so that you can then figure out what the proper rate would be or how much you should pay them based on the progressive tax rate so that definitely adds some complexity into the situation which adds a little bit of uncertainty which you would think would dampen a bit of of the of GDP growth and whatnot now note that changes in the law when changes in the law happen the changes will often be of a type where they're going to make something more or less progressive so you can you can imagine people saying I think there should be more layers in this thing so that we have so that we have we're taxing when as people earn more money they should have higher tax rates applied to them so in that case it would be more progressive which a lot of times it sounds good obviously the term progressive sounds good and the idea of people that have the money paying more to some extent is a good idea you know although you don't want to damp in GDP actual growth in the economy because that's the thing that ultimately funds the the the growth that everybody is going to be participating in so or you can imagine someone saying I would like to flatten this meaning I would like to just say let's have just less categories we're not going to take it down to a flat tax but for goodness sake let's let's make it a little bit more less right they could they could try to flatten it down a little bit or you can imagine some people saying well I'll keep the number of of different categories here but I'll change I'll tweak the percent so that possibly the high percent I'm going to make really high or something like that and that and you would think that that would be more of a progressive tax system then because the higher level income earners you're tweaking their rates up or you can flatten it out and say well I'm not going to change the number of tiers but I'm going to make the rates more closer together instead of having this big a big jump if I earn you know from 44 725 up so you can see where the debate comes in the debate doesn't usually come in well flat tax no progressive tax no we already have a progressive tax the debate comes in in terms of should we make the progressive tax more or less complicated should we make the progressive tax more or less flat what's the argument between something being more quote fair and more and what's the argument between what's going to be making something that's going to be more conducive to actual GDP growth because the growth ultimately is what everybody's kind of living on and then we've got the term of progressive of regressive now regressive is always going to be a term to kind of downplay attacks so if a politician doesn't like attacks then you're going to call it regressive so the tax rate decreases as wage base increases meaning the tax burden is going to be more heavily on the lower income individuals which is of course not what you want you want the taxes to be on the people that can afford to pay the taxes but also you want the taxes to be delivered you know enough in what we would call like a fair type of way and whatever that basically means right so sales tax may cause this for example so on a sales tax system when we compare like an income tax to a sales tax in the united states we often have this argument of saying well maybe we should just go to a usage tax or sales tax system and tax people like many places in europe and many states do when they earn the revenue as opposed to when when i'm sorry when they spend the money as opposed to when they earn it so that would be more of a sales tax type of system and that could be a fairly simple system to use but you would think it would be very difficult to actually apply that on the federal government side of things because that means you would have to completely dismantle the income tax structure which i feel like that's politically even if it would be a good thing to do it'd be very very difficult to do so i don't really think i think more likely what would end up happening is you end up putting in a sales tax on top of the income tax and now we'll have two taxes that grow like crazy but in theory you can argue which is better a sales tax or an income tax and the people that like the income tax would say that the sales tax is regressive and the idea on that would be the people that are buying stuff when you're buying stuff are you buying stuff out of necessity or are you buying stuff out of because you want to buy stuff do you have the capacity to save the argument being that if you're a low income individual you're spending all of your money buying necessities food energy that's what you're spending your money on and so you're spending a hundred percent of your earnings on food and energy basically whereas if you're wealthy you're earning more than you need to consume you can save money and therefore you are not you're not paying any taxes on the money you're saving meaning a sales or usage tax actually incentivizes savings whereas what we have an income tax often incentivizes does not incentivize saving you know spending is actually good because some of the stuff we spend on could be like deductible stuff but again that's way that's often way too simplified of an argument because you can think of a sales tax type of system where it could still be a non regressive type of system because all you would have to do is to say well if we're talking about a sales tax and low income individuals spend all of their money on food and energy how about we have a sales tax system where the taxes applied on everything except food and energy right that's all you and then and then of course the people that spend all their money on the necessities wouldn't be paying any tax and the taxes would be paid by those that are buying like yachts and whatnot that are spending their money extravagantly oftentimes and then which would be the wealthy individuals and they're often spending more money than they earn because it might be old money right they're spending money that they inherited not money that they currently earned and so they might be paying you know they're paying more taxes on they've made more taxes on what they even earned so it's quite possible so it's it's not really fair again when you hear the sound bites of well you know the sales tax is regressive and the and the income tax is a progressive tax system and you you've got to kind of dig a little bit deeper because there's often different ways that you can tweak the tax code and obviously no matter what taxes get put in place the government usually tweaks them the wrong way and so they make it completely complicated so if you replace the income tax with a sales tax you could make a sales tax work but it's likely the government will tweak it to make it ridiculous you know that's kind of the trend that seems to happen but in any case those are some of the general terms