Investment Updates
You Have Entered The Twilight Zone Of Taxation
Published Monday, March 24, 2014 at: 7:00 AM EDT
Rod Serling, creator of the classic science-fiction TV series, "The Twilight Zone," could not have come up with a stranger tax structure. You have entered a five-dimensional tax zone, a tax labyrinth so strange it almost seems like science fiction.
There’s more to the federal income tax system than just a single calculation. In fact, upper-income taxpayers--especially those generating income from investments—actually must cope with five “dimensions” of taxation: (1) ordinary income tax; (2) capital gains and losses; (3) the alternative minimum tax; (4) the net investment income tax; and (5) a reduction of itemized deductions and personal exemptions. Here’s a quick rundown:
1. Ordinary income tax. This is the standard tax calculation we’re all familiar with. The income you earn generally is taxed under a graduated rate structure with seven tax brackets: 10%; 15%; 25%; 28%; 33%; 35%; and 39.6%. If you’re in the top tax bracket, any extra income you earn is taxed at the 39.6% rate. Tax deductions and credits can be used to offset your tax liability based on these ordinary income rates, but certain special rules may apply (see #5).
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