Finance: What is Ordinary Income v Long-Term Gain Income?

What is ordinary income versus long-term gain income? Hit play to find out.

College and CareerPersonal Finance
CoursesFinance Concepts
FinanceFinance Definitions
Financial Responsibility
Personal Finance
Finance and EconomicsTerms and Concepts
LanguageEnglish Language
Life SkillsFinance Definitions
Personal Finance
SubjectsFinance and Economics
Terms and ConceptsAccounting
Metrics
Muni Bonds
Real Estate
Tax
Wealth

Transcript

00:28

gains from investments or passive income you know like stocks that went up and

00:33

then we're sold for cash or land that was bought cared for appreciated in [Land stamped with sold]

00:37

value and then sold for cash well the two big keys in differentiating these

00:41

concepts revolve around a the type of income that's coming in I heat if you

00:46

hauled bricks to earn the money it's ordinary actively earned income [Bricks land into wheelbarrow]

00:51

plain-vanilla work-related and be that money can be made from investment gains

00:56

and there's a curveball here in that if the gains were realized or the [Man hit by a baseball]

01:00

investment was turned into profits in the form of cash I eat you sold the land

01:04

for cash not in barter for another piece of land and you did it in less than one

01:09

year after buying it well then the tax rate applied will be the ordinary income [Tax rate table appears]

01:14

level the higher level in part because well if you turned it into profits so

01:19

quickly well the government figures it was kind of your job and you were

01:23

working it pretty hard in that less than one year time period and so you actively

01:27

earned the money and to punish you for working hard they tax you at a higher

01:31

rate like the brick hauling ordinary income is earned rather than passive [Bricks falling and dollar signs appear]

01:35

long term investing gains the differences can be massive in a blue

01:39

state the marginal ordinary income rate post Trump hovers somewhere a bit beyond [Blue states appear in US]

01:44

50 percent assuming no incremental city tax piled on top hello Manhattan we're

01:49

looking at you the long-term gain rate hovers around 25 percent and in a red

01:54

state with a no state tech long-term gain hovers around 20 percent and change

01:58

there's Obamacare thrown in there so on and so if you had a gain of a

02:02

million bucks on a security you've held 364 days and you sell it that day while

02:07

you keep a bit less than 500 grand if you wait another day or two before

02:11

selling while you keep more like 750 grand from that million yeah it's a

02:16

delta of a quarter of your entire investment courtesy of qualifying for

02:20

long-term gain treatment rather than short-term so just like the conclusion [A corvette appears]

02:24

of a really good Saturday night you always want to try to go long-term in

02:28

instead of short