Notes on Taxation, Income Tax, and Capital Gains

Ordinary Income Tax

• Definition: Ordinary income tax refers to the tax imposed on income earned from regular sources such as salaries, wages, rents, and profits from the sale of goods.
• Example: After adjustments and deductions, if the total ordinary income is $19,000, this amount will be subject to the ordinary income tax rates applicable for the year.

Capital Gains Tax

• Definition: The capital gains tax is applied to the profit made from the sale of certain assets, including stocks, land, or machinery.
• Types of Capital Gains:
  • Short-term capital gains: Gains on assets held for one year or less, usually taxed at ordinary income tax rates.
  • Long-term capital gains: Gains on assets held for more than one year, typically benefiting from lower tax rates compared to ordinary income.
• Tax Exemption: Capital gains income is not subject to self-employment tax, a separate tax imposed primarily on self-employed individuals' earnings.

Self-Employment Tax

• Definition: This is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves.
• Current Rate: The self-employment tax rate is approximately 15.3% on net earnings, which includes both portions (Social Security and Medicare).
• Confusion Point: There are different rates to understand, one being the tax on net earnings and the other being self-employment tax which can make calculations complex.

Federal Income Tax Brackets

• Income Tax Calculation: Example of calculating the income tax:
  • If an individual has $10,000 in taxable income at a 22% tax rate, the income tax = 10,000 imes 0.22 = 2,200.
• 2024 Tax Rates: For specifics related to 2024 tax rates, it is recommended to Google for the most current tax brackets to ensure accuracy during calculations.

Preparation for Exam

• Study Strategies: It is essential to start studying well before the exam, although some individuals delay studying until a few days prior.
• Materials Needed: Students will likely be provided with necessary information such as the current tax brackets and rates during the exam.