From the course: Finance Foundations: Income Taxes

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Strategy 3: Change the character of the income

Strategy 3: Change the character of the income

From the course: Finance Foundations: Income Taxes

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Strategy 3: Change the character of the income

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- The third basic tax strategy is to change the character of the income, which can then change the rate at which the income is taxed. Tax payers wish income to be classified as long-term capital gain income, which is usually taxed at a lower rate than is ordinary income. Remember, ordinary income comes from working for an employer, owning and operating your own business, earning interest on a bank account, and so forth. It's ordinary. Capital gains income is income earned from buying an asset low and selling it high. Simple examples are stock investments or real estate investments that increase in value. The capital gains income is the amount of the value increase. With ordinary income in the United States, the tax rates depending on the level of income range from 10% to 37%. However, again in the United States, long-term capital gains income tax rates vary depending on your overall level of income from zero to 15%, or sometimes as high as 20%. The key point is that long-term capital…

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