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what is a take profit order t p | a take profit order t p is a type of limit order that specifies the exact price at which to close out an open position for a profit if the price of the security does not reach the limit price the take profit order does not get filled basics of a take profit ordermost traders use take profit orders in conjunction with stop loss orders s l to manage their open positions if the security rises to the take profit point the t p order is executed and the position is closed for a gain if the security falls to the stop loss point the s l order is executed and the position is closed for a loss the difference between the market price and these two points helps define the trade s risk to reward ratio the benefit of using a take profit order is that the trader doesn t have to worry about manually executing a trade or second guessing themselves on the other hand take profit orders are executed at the best possible price regardless of the underlying security s behavior the stock could start to breakout higher but the t p order might execute at the very beginning of the breakout resulting in high opportunity costs take profit orders are best used by short term traders interested in managing their risk this is because they can get out of a trade as soon as their planned profit target is reached and not risk a possible future downturn in the market traders with a long term strategy do not favor such orders because it cuts into their profits take profit orders are often placed at levels that are defined by other forms of technical analysis including chart pattern analysis and support and resistance levels or using money management techniques such as the kelly criterion many trading system developers also use take profit orders when placing automated trades since they can be well defined and serve as a great risk management technique take profit order examplesuppose that a trader spots an ascending triangle chart pattern and opens a new long position if the stock has a breakout the trader expects that it will rise to 15 percent from its current levels if the stock doesn t breakout the trader wants to quickly exit the position and move on to the next opportunity the trader might create a take profit order that is 15 percent higher than the market price in order to automatically sell when the stock reaches that level at the same time they may place a stop loss order that s five percent below the current market price the combination of the take profit and stop loss order creates a 5 15 risk to reward ratio which is favorable assuming that the odds of reaching each outcome are equal or if the odds are skewed toward the breakout scenario by placing the take profit order the trader doesn t have to worry about diligently tracking the stock throughout the day or second guessing themselves with regards to how high the stock may go after the breakout there is a well defined risk to reward ratio and the trader knows what to expect before the trade even occurs | |
what is a takeover | a takeover occurs when one company makes a successful bid to assume control of or acquire another takeovers can be done by purchasing a majority stake in the target firm takeovers are also commonly done through the merger and acquisition process in a takeover the company making the bid is the acquirer and the company it wishes to take control of is called the target takeovers are typically initiated by a larger company seeking to take over a smaller one they can be voluntary meaning they are the result of a mutual decision between the two companies in other cases they may be unwelcome in which case the acquirer goes after the target without its knowledge or some times without its full agreement in corporate finance there can be a variety of ways for structuring a takeover an acquirer may choose to take over controlling interest of the company s outstanding shares buy the entire company outright merge an acquired company to create new synergies or acquire the company as a subsidiary fangxianuo getty imagesunderstanding takeoverstakeovers are fairly common in the business world however they may be structured in a multitude of ways whether both parties are in agreement or not will often influence the structuring of a takeover keep in mind if a company owns more than 50 of the shares of a company it is considered controlling interest controlling interest requires a company to account for the owned company as a subsidiary in its financial reporting and this requires consolidated financial statements 1 a 20 to 50 ownership stake is accounted for more simply through the equity method 2 if a full on merger or acquisition occurs shares will often be combined under one symbol types of takeoverstakeovers can take many different forms a welcome or friendly takeover will usually be structured as a merger or acquisition these generally go smoothly because the boards of directors for both companies usually consider it a positive situation voting must still take place in a friendly takeover however when the board of directors and key shareholders are in favor of the takeover takeover voting can more easily be achieved usually in these cases of mergers or acquisitions shares will be combined under one symbol this can be done by exchanging shares from the target s shareholders to shares of the combined entity an unwelcome or hostile takeover can be quite aggressive as one party is not a willing participant the acquiring firm can use unfavorable tactics such as a dawn raid where it buys a substantial stake in the target company as soon as the markets open causing the target to lose control before it realizes what is happening the target firm s management and board of directors may strongly resist takeover attempts by implementing tactics such as a poison pill which allows the target s shareholders to purchase more shares at a discount to dilute the potential acquirer s holdings and voting rights a reverse takeover happens when a private company takes over a public one the acquiring company must have enough capital to fund the takeover reverse takeovers provide a way for a private company to go public without having to take on the risk or added expense of going through an initial public offering ipo a creeping takeover occurs when one company slowly increases its share ownership in another once the share ownership gets to 50 or more the acquiring company is required to account for the target s business through consolidated financial statement reporting 1 the 50 level can thus be a significant threshold particularly since some companies may not want the responsibilities of controlling ownership after the 50 threshold has been breached the target company should be considered a subsidiary creeping takeovers may also involve activists who increasingly buy shares of a company with the intent of creating value through management changes an activist takeover would likely happen gradually over time the ownership threshold for controlling vs non controlling ownership reasons for a takeoverthere are many reasons why companies may initiate a takeover an acquiring company may pursue an opportunistic takeover where it believes the target is well priced by buying the target the acquirer may feel there is long term value with these takeovers the acquiring company usually increases its market share achieves economies of scale reduces costs and increases profits through synergies some companies may opt for a strategic takeover this allows the acquirer to enter a new market without taking on any extra time money or risk the acquirer may also be able to eliminate competition by going through a strategic takeover there can also be activist takeovers with these takeovers a shareholder seeks controlling interest ownership to initiate change or acquire controlling voting rights companies that make attractive takeover targets include funding takeoversfinancing takeovers can come in many different forms when the target is a publicly traded company the acquiring company can buy shares of the business in the secondary market in a friendly merger or acquisition the acquirer makes an offer for all of the target s outstanding shares a friendly merger or acquisition will usually be funded through cash debt or new stock issuance of the combined entity | |
when a company uses debt it s known as a leveraged buyout debt capital for the acquirer may come from new funding lines or the issuance of new corporate bonds | example of a takeoverconagra initially attempted a friendly acquisition of ralcorp in 2011 when initial advances were rebuffed conagra intended to work a hostile takeover ralcorp responded by using the poison pill strategy conagra responded by offering 94 per share which was significantly higher than the 65 per share ralcorp was trading at when the takeover attempt began ralcorp denied the attempt though both companies returned to the bargaining table the following year 3 the deal was ultimately made as part of a friendly takeover with a per share price of 90 4 by this time ralcorp had completed the spinoff of its post cereal division resulting in approximately the same offering price by conagra for a slightly smaller total business 5 | |
what is a tangible asset | a tangible asset is an asset that has a finite monetary value and usually a physical form tangible assets can typically always be transacted for some monetary value though the liquidity of different markets will vary tangible assets are the opposite of intangible assets which have a theorized value rather than a transactional exchange value investopedia candra huffunderstanding tangible assetsa business s net worth and core operations are highly dependent on its assets management of assets and asset implications is one key reason why companies maintain a balance sheet assets are recorded on the balance sheet and must balance in the simple equations assets minus liabilities equals shareholders equity which governs the balance sheet companies have two types of assets tangible and intangible tangible assets are assets with a finite or discrete value and usually a physical form these are items a company uses in its operations that it can touch and utilize in the real world there are several common characteristics that most tangible assets have types of tangible assetstangible assets can be either current assets or long term assets current assets may or may not have a physical onsite presence but they will have a finite transaction value long term assets sometimes called fixed assets comprise the second portion of the asset section on the balance sheet these long term assets have less liquidity and are often more capital intensive in nature long term assets are usually tangible assets much larger in size tangible assets are recorded on the balance sheet at the cost incurred to acquire them long term tangible assets are reduced in value over time through depreciation depreciation is a noncash balance sheet notation that reduces the value of assets by a scheduled amount over time current assets are converted to cash within one year and therefore do not need to be devalued over time for example inventory is a current asset that is usually sold within one year if you can physically touch a product it is tangible therefore many types of inventory are tangible assets be mindful that very similar products may have different characteristics for example a cd from your favorite artist could be physical inventory though digital mp3 files of the same songs are intangible tangible inventory assets cover the entire spectrum of manufacturing this begins with sourced raw materials and continues to goods in process that the company has begun manufacturing last tangible assets also includes finish products that the company has not yet sold that are being reported as inventory | |
when looking around an office essentially everything in view is a tangible asset whether its desks cubicles computer set ups office furniture for visitors components of meeting rooms supplies or other furnishings almost every aspect of a workplace can be touched and interacted with | regardless of how it is intended to be used land is a tangible asset this is true whether the land is being held for speculative growth future redevelopment or the long term plans are not yet known this is also true of all types of land whether rural or city physical land is a tangible asset this is counter to digital plots of ownership emerging in metaverse platforms because the section of real estate can not be touched digital land is not a tangible asset physical structures are often the largest and most obvious type of tangible asset this may include offices warehouses manufacturing plants or other types of commercial real estate whether or not a company has shifted to remote work any existing office even not being utilized is a tangible asset improvements to that building are often tangible assets as well tangible assets is not a category reported on financial statements instead these assets are spread across current and long term assets | |
how to value tangible assets | there s three primary ways a tangible asset can be valued the uniqueness location and condition of the tangible asset will drive the ideal valuation method mentioned below | |
when the most precise tangible asset value is needed a company often hires an external independent appraiser the appraiser is often an expert in a given field i e an expert in a specific type of collectible or an expert in real estate the appraiser evaluates the condition of the tangible asset as well as incorporating external factors impacting the value | at the end of an appraisal the appraiser often issues an appraisal report that report outlines the conditions of the asset for properties specific sections will often exist for the interior and exterior conditions the report will note modernization efforts construction quality market conditions and any notable impairments to recognize for the asset one could argue that the value of a tangible is the money it is able to fetch for it in the open market with this reasoning the value of a tangible asset is the liquidation price it would receive should it brought to market regardless of an external appraisal or insurance report a company may treat a tangible asset only worth whatever they can immediately sell it for liquidation price will often be less than an appraiser s value for several reasons first there are usually significant costs that a company may incorporate into the liquidation price second some tangible assets are illiquid and may be difficult to move for this reason a company may be forced to incentivize buyers with substantial pricing discounts that do not property reflect the true value of the building when sold in a normal careful sale process the third type of valuation method is primarily used by insurance carriers as part of a policy insurers generally use replacement cost as the basis for determining what a building is worth for this reason the insurance company will set the policy so in case there is a claim the claimant may receive proceeds to replace their asset not necessarily receiving compensation for the actual full value advantages and disadvantages of tangible assetstangible assets hold real value buildings can be occupied land can be utilized and machinery can be used as opposed to investments or intangible assets real assets hold a purpose beyond their means as an investment for this reason some argue tangible assets make more sense in specific investment climates for example farmland is always in demand as the world continually needs agriculture and food during uncertain investment periods some advisors may claim that this type of tangible asset makes sense to invest in due to the stable use of such an asset in addition the asset class may move entirely differently than the stock market due to being a completely different type of asset by extension tangible assets usually have dual investment opportunity valuation appreciation and operating cash flow consider a commercial office in a favorable downtown location not only is the property value likely increasing the building owner is receiving rent from tenants because tangible property can be used it can generate operating income on top of increasing in value government agencies often have guidance and limitations to what may be considered tangible assets it may also choose to segregate tangible assets by category such as california s state administrative manual 1not everything is perfect for tangible assets though consider the risks to farmland such inclement weather or improper tilling techniques that deplete the arability of the land in addition consider the risk of obsolescence for the building during covid 19 as workers shifted to remote work such offices were left vacated and not needed by companies smaller tangible assets may be an easier target for theft as well the theft of digital assets may require technical knowledge and your actions may still be traceable back to your personal accounts for tangible assets such as inventory illegal ownership is a function of physically possession if a thief can walk out of a store with new headphones they claim ownership of the tangible asset even if it is not rightfully theirs therefore it may cost more to protect store and oversee tangible assets may be more stable investment due to consistent underlying useoften has real world application that increases its valuemay generate cashflow if rented out for usemay have low correlation to other asset classes due to difference in underlying asset profilemay be subject to physical damage via nature or intentional human destruction may become obsolete if more advanced tangible assets are introducedmay be more subject to theft due to potentially easier accessoften requires additional expenses to store manage and protect goodstangible vs intangible assetsasset values are important for managing shareholders equity and the return on equity ratio metric tangible and intangible assets are the two types of assets that makeup the full list of assets comprehensively for a firm as such both values are recorded on the balance sheet and analyzed in total performance management intangible assets include non physical assets that usually have a theoretical value generated by a firm s own valuation these assets include things like copyrights trademarks patents licenses and brand equity value intangible assets are recorded on a balance sheet as long term assets there are some itemized values associated with intangible assets that can help form the basis of their balance sheet value such as their registration and renewal costs generally though expenses associated with intangible assets will fall under general and much of intangible value must be determined by the firm itself intangible assets such as goodwill cannot usually be sold individually in an open market but in some cases they may be acquired from other companies they may also be paid for and transferred as part of an acquisition or merger deal intangible assets do contribute to a firm s net worth and total value if they are recorded on the balance sheet but it is up to the firm to decide on any carrying value can be physically touchedmay have real world use such as consumption or physical utilization | |
are usually more difficult to store manage and insure | may have more stable value due to underlying need in societymay be difficult to transfer ownership if physical possession is required i e shipping a delicate rare collectible can not be physically touchedoften does not have real world use such as consumption or physical utilization | |
are usually easier to store manage and insure | may have less stable value due to lack of need in societyusually easier to transfer ownership of as physical possession is not a consideration | |
what is an example of a tangible asset | consider the example of a car manufacturer preparing the assembly and distribution of a vehicle the raw materials acquire are tangible assets and the warehouse in which the raw materials are stored is also a tangible asset the manufacturing building and equipment are tangible assets and the finished vehicle to be sold is tangible inventory | |
what makes an asset tangible | an item is tangible if it can be touched and has a real physical presence some definitions of tangible may include the description that the asset can be seen but this description could also be used to describe items you can t touch i e digital currency balances can be seen on a monitor | |
what is the difference between a tangible asset and intangible asset | tangible assets can be touched while intangible assets can t many intangible assets are conceptual i e goodwill while tangible assets are items that actually have a physical presence and use in the real world i e a company car while it may be easier to store protect and transfer intangible assets tangible assets may have a real world application and need | |
what is the main benefit of tangible assets | tangible assets have inherent value because of their usefulness in life for example land has value because it can be used for buildings parks agriculture schools community centers parking lots or homes for animals the same can t be said about intangible assets the value of a single share of stock is the ownership property it represents although you may receive a piece of paper that states the ownership the asset can t be used for anything beyond its vehicle as an investment the bottom linecompanies own many different assets and one type of asset a company may own is a tangible asset tangible assets are things that can be touched that also provide future economic benefit to the company though tangible assets have the benefit of having actual use in the real world they also necessitate additional care for physical safeguarding and preservation | |
what is tangible book value per share tbvps | tangible book value per share tbvps is a method by which a company s value is determined on a per share basis by measuring its equity without the inclusion of any intangible assets intangible assets are those that lack physical substance thus making their valuation a more difficult undertaking than the valuation of tangible assets tbvps is similar to price to tangible book value ptbv the formula for tbvpstbvps total tangible assets total number of shares outstanding where tbvps tangible book value per share begin aligned text tbvps frac text total tangible assets text total number of shares outstanding textbf where text tbvps text tangible book value per share end aligned tbvps total number of shares outstandingtotal tangible assets where tbvps tangible book value per share understanding tangible book value per sharetangible book value tbv of a company is what common shareholders can expect to receive if a firm goes bankrupt thereby forcing the liquidation of its assets at the book value price intangible assets such as goodwill are not included in tangible book value because they cannot be sold during liquidation however companies with high tangible book values tend to offer shareholders more downside protection in the case of bankruptcy tangible book value per share thus focuses solely on the value of an organization s tangible assets such as buildings and equipment once the value of the tangible assets is determined that amount is divided by the number of the company s current outstanding shares the amount determined in this process is recognized as the company s tbvps tbv provides an estimate regarding the value of the company if it goes bankrupt and is forced to liquidate the entirety of its assets since certain intrinsic characteristics such as goodwill or employee knowledge cannot be liquidated for a price tbv does not include intangible assets the tbv applies only to physical items that can be handled and sold at an easily determined market value certain online databases and websites allow potential investors to examine the progress of a company s tbvps over time requirements for tangible book value per sharean organization s tangible assets can include any physical products the company produces as well as any materials used to produce them should an organization be in the business of producing bicycles for instance any completed bicycles unused bicycle parts or raw materials used during the process of fabricating bicycles would qualify as tangible assets the value of these assets is determined based on what price they would draw should the company be forced to liquidate most commonly in the event of a bankruptcy aside from assets related to the production of a product any equipment used to create the product can be included as well this can include any tools or machinery required to complete production as well as any real estate owned and used for the purposes of production additional business equipment such as computers and filing cabinets may also be considered tangible assets for the purpose of valuation criticism of tbvpsbook value refers to the ratio of stockholder equity to the number of shares outstanding it takes into account only the accounting valuation which is not always an accurate reflection of the current market valuation or of what could be received during a sale | |
what is tangible common equity tce | tangible common equity tce is a measure of a company s physical capital which is used to evaluate a financial institution s ability to deal with potential losses it is often used when analyzing financial firms that do not normally have a relatively large amount of tangible assets tangible common equity is calculated by subtracting intangible assets including goodwill and preferred equity from the company s book value understanding tangible common equitycompanies own both tangible physical and intangible assets a building is tangible for instance while a patent is intangible the same can be said about a firm s equity financial companies are most often evaluated using tce measuring a company s tce is particularly useful for evaluating companies that have large amounts of preferred stock such as u s banks that received federal bailout money in the 2008 financial crisis in exchange for bailout funds those banks issued large amounts of preferred stock to the federal government 1 a bank can boost tce by converting preferred shares to common shares using tangible common equity can also be used to calculate a capital adequacy ratio as one way of evaluating a bank s solvency and is considered a conservative measure of its stability tce is not required by gaap or bank regulations and is typically used internally as one of many capital adequacy indicators 2special considerationsthe tce ratio tce divided by tangible assets is a measure of capital adequacy at a bank the tce ratio measures a firm s tangible common equity in terms of the firm s tangible assets it can be used to estimate a bank s sustainable losses before shareholder equity is wiped out depending on the firm s circumstances patents might be excluded from intangible assets for the purposes of this equation since they at times can have a liquidation value another way to evaluate a bank s solvency is to look at its tier 1 capital which consists of common shares preferred shares retained earnings and deferred tax assets banks and regulators track tier 1 capital levels to assess the stability of a bank notably lower risk assets held by a bank such as u s treasury notes carry more safety than low grade securities regulators do not require regular submissions of tier 1 capital levels but they come into play when the federal reserve conducts stress tests on banks 3example of tangible common equitysay that xyz bank had for the fiscal year 2021 a book value of 273 8 billion its goodwill was 69 01 billion intangible assets 2 2 billion and preferred stock 24 billion thus xyz bank s tangible common equity at the end of 2021 was 178 59 billion 273 8 billion 69 01 billion 2 2 billion 24 billion many banks break out tangible common equity in the supplemental documents on their financial statements | |
what does tangible common equity measure | tangible common equity is an estimation of the liquidation value of a firm or what might be left over for distribution to shareholders if the firm were liquidated | |
what is the tangible common equity ratio used for | the tangible common equity ratio tce divided by tangible assets can be used as a measure of leverage high ratio values indicate less leverage and a larger amount of tangible equity compared to tangible assets | |
when is tangible common equity useful | tangible common equity is most often used when evaluating the position of financial companies like banks it looks only at a firm s physical capital to evaluate a financial institution s ability to use them as collateral be able to cover potential losses | |
what is tangible net worth | tangible net worth is most commonly a calculation of the value of a company that excludes any value derived from intangible assets such as copyrights patents and intellectual property for an individual the tangible net worth calculation includes home equity any other real estate holdings bank and investment accounts and major personal assets such as an automobile or jewelry relatively insignificant personal assets are not ordinarily included in the calculation for an individual investopedia ryan oakleyformula and calculation of tangible net worthtnw total assets liabilities intangible assetswhere tnw tangible net worth begin aligned text tnw text total assets text liabilities text intangible assets textbf where text tnw text tangible net worth end aligned tnw total assets liabilities intangible assetswhere tnw tangible net worth tangible net worth is calculated as follows tangible net worth can also be calculated for individuals using the same formula of total tangible assets minus total debt liabilities | |
what tangible net worth can tell you | tangible net worth for a company is essentially the total value of a company s physical assets these assets can include the tangible net worth calculation is designed to represent the total value of a company s physical assets net of its outstanding liabilities as based on figures shown in the company s balance sheet in effect it indicates an approximation of the liquidation value of the company in the event of bankruptcy or sale the primary positive of the tangible net worth calculation is that it is simpler to do than a total net worth calculation as it is easier to place an accurate value on physical assets than it is to evaluate intangible assets such as customer goodwill or intellectual property intellectual property includes things such as proprietary technology or designs tangible net worth is a factor often considered by a lender from whom a company or individual is seeking financing typically banks and creditors will use physical assets of a company to secure a borrowing facility if the company fails to make payments or defaults the bank can legally seize the assets the tangible net worth calculation helps creditors determine the size and terms of the borrowing facility so that they don t lend more than the company s assets are worth limitations of using tangible net wortha drawback of using tangible net worth is that it may fall substantially short as a representation of actual value in cases where a company or an individual has intangible assets of considerable value for example a major computer software firm such as microsoft corporation nasdaq msft may possess a wealth of intellectual property rights and other intangible assets that are worth billions of dollars which would be excluded from the tangible net worth calculation one item that can complicate the tangible net worth calculation is subordinated debt debt that in the event of a default or liquidation is only repaid after all debt obligations to senior debt holders have been satisfied a simple example of subordinated debt is a secondary mortgage held on real estate the secondary mortgage is only repaid after the debt represented by the primary mortgage is paid off if the value of the property on which a company or individual holds subordinated debt is not sufficient to retire that debt in addition to the debt owed to senior and primary debt holders then the subordinated debt should not be included in the calculation of tangible net worth | |
what is tangible personal property | tangible personal property is a tax term describing personal property that can be felt or touched and physically relocated such as furniture office equipment machinery and livestock it is always depreciated over either a five or seven year period using straight line depreciation but is eligible for accelerated depreciation as well and is taxed in several countries including large chunks of the u s understanding tangible personal propertytangible personal property is the opposite of real property in a sense as real property is immovable it can also be touched unlike intangible personal property 1tangible personal property or tpp as it is sometimes called includes items such as furniture machinery cell phones computers and collectibles intangibles on the other hand consist of things that cannot be seen or touched like patents and copyrights most states impose property taxes on tangible personal property these are collected on top of the taxes applied to real property like land and buildings to help fund various services such as schools roads and emergency medical services tangible personal property taxes are regulated at the state level but are levied primarily by local governments they can vary considerably by jurisdiction 12some states don t charge a tangible personal property tax and those that do may only apply it to certain items such as personal property that is valued above a certain threshold or only used for business purposes 2 | |
how tangible personal property is taxed | tangible personal property can be subject to ad valorem taxes meaning the amount of tax payable depends on each item s fair market value in most states a business that owned tangible property on january 1 must file a tax return form with the property appraisal office no later than april 1 in the same year the property appraiser places a value on the property and the tax amount due is calculated by multiplying the property value by the tax rate set by the tax authorities in the state 34tangible personal property tax rules vary considerably even among neighboring municipalities 3some counties and cities require the filer to list all property on the tax form and to provide the fair market value and cost for each tangible property in these cases the county will also provide a valuation table that can be used to estimate the value of the property based on its age and useful life some states only apply a tax on tangible property in the year the property was purchased tangible personal property tax is paid by a landlord or company to its local government but landlords or company owners can claim a deduction on federal income tax returns to claim the deduction the tax must only apply to personal property owned and bought for the business operation be based on its fair market value and be charged on an annual basis as opposed to a one time basis 56tangible personal property vs intangible propertytangible assets are physical items that can be touched and seen such as machinery buildings and inventory these assets are typically used for a company s operations and are typically subject to depreciation over their useful life think of some machinery that is physically used that breaks down and needs fixing intangible assets on the other hand lack physical substance but have value due to their legal or economic benefits examples of intangible assets include patents trademarks copyrights and goodwill these types of assets may lose value but they generally don t depreciate instead for tax purposes intangible assets are generally amortized over their useful life or a statutory period defined by the irs usually 15 years for most intangibles amortization allows businesses to deduct the cost of these assets over time similar to depreciation for tangible assets thereby reducing taxable income gradually the distinction between tangible and intangible assets is a part of the tax code as there is different tax treatment tangible assets are often subject to different tax rules and recovery periods compared to intangible assets additionally the initial cost basis which is the starting point for depreciation or amortization can vary depending on whether the asset was purchased produced or acquired through other means properly categorizing assets ensures compliance with tax laws and maximizes allowable deductions tax regulations can also impose specific rules for the capitalization of costs associated with acquiring or creating both types of assets for tangible assets costs such as installation transportation and testing may be capitalized while for intangible assets legal fees registration costs and other expenditures directly related to securing the intangible property are included in the asset s basis 7 all of this is to say that the distinction between tangible personal property and intangible property does matter in the eyes of the irs example of how tangible personal property is taxedin florida anyone who has a proprietorship partnership or corporation is a self employed agent or contractor or leases lends or rents property and owned tangible personal property on jan 1 must complete form dr 405 and submit it to their local property appraiser by april 1 894if the tangible personal property is valued above 25 000 the entity or person will start paying tax on it the property appraisal office will usually mail a letter to the company notifying it to file taxes on its property if the company or landlord believes the letter is not applicable they can return the letter to the office along with another letter explaining why taxes on tangible personal property do not apply to the business 98many states are aiming to eliminate or reduce personal property taxes 10 | |
where is tangible personal property not taxed | seven states exempt all tangible personal property from taxation they are moreover other states exempt most tangible personal property from taxation they include resistance against a tangible personal property tax appears to be growing according to multistate a state and local government relations company 23 states sought to reduce or eliminate taxes on tangible personal property 10the tax has been described as complex costly to administer and guilty of pushing businesses to set up shop in other states with friendlier rates 2tangible personal property and depreciationtangible personal property is typically depreciated over its useful life the irs provides guidelines for different classes of property under the modified accelerated cost recovery system macrs this system outlines specific depreciation methods and recovery periods depending on the type of asset 11the most commonly used depreciation methods under macrs are the general depreciation system gds and the alternative depreciation system ads gds usually provides faster depreciation through methods like the double declining balance while ads offers a longer recovery period with a straight line method often used for tax exempt and foreign use property section 179 of the irs code allows businesses to expense the full purchase price of qualifying tangible personal property in the year it is placed in service rather than capitalizing and depreciating it over time for tax year 2023 the maximum deduction limit is 1 160 000 with a phase out threshold of 2 890 000 this provision is designed to encourage businesses to invest in new equipment by providing immediate tax relief to qualify for section 179 expensing the property must be tangible personal property acquired for use in a trade or business newly purchased not acquired from a related party or through a gift or inheritance and placed in service during the tax year bonus depreciation allows businesses to deduct a significant percentage of the cost of qualifying property in the year it is placed in service as of the tax cuts and jobs act of 2017 businesses can take 100 bonus depreciation on new and used tangible personal property acquired and placed in service after september 27 2017 and before january 1 2023 note that this provision phases down by 20 each year starting in 2023 with no bonus depreciation available after 2026 unless congress extends it 12 | |
what is an example of tangible personal property | tangible personal property consists of anything that can be felt or touched and physically relocated that can include big items such as cars refrigerators livestock and gasoline storage tanks and pumps at retail service stations as well as little stuff such as a printer cell phone or jewelry 13 | |
what qualifies as an intangible asset | an intangible asset is something of value that is not physical in nature classic examples include brands goodwill and intellectual property these things are worth a lot to companies but cannot be held or touched and are sometimes more difficult to value | |
what is the tangible personal property tax in pennsylvania | pennsylvania is one of the states that doesn t collect personal property taxes it doesn t technically collect real property taxes either although several of its counties municipalities and school districts do 1014the bottom linetangible personal property or tpp as it is often called is personal property that can be felt or touched and physically relocated that covers a lot of stuff including equipment livestock and jewelry in many states these items are subject to ad valorem taxes how tangible personal property is taxed can vary considerably not just by state but also by city some places rely heavily on this tax whereas others have completely banned it or offer various exemptions | |
what is tape reading | tape reading is an old technique that day traders used to analyze the price and volume of a given stock from roughly the 1860s through the 1960s stock prices were transmitted over telegraph lines on ticker tape that included a ticker symbol price and volume these technologies were phased out in the 1960s with the rise of personal computers and electronic communication networks ecns understanding tape readingticker tapes were invented in 1867 by edward a calahan for the gold and stock telegraph company thomas edison developed the first practical stock ticker in 1871 that helped the market became more efficient 1 these machines were soon installed across all major brokerages as the primary means of price and volume dissemination many famous traders made a name for themselves by tape reading including jesse livermore who pioneered momentum trading several books were also published about tape reading including tape reading and market tactics and reminiscences of a stock operator many terms also remain in common use since then including ticker symbol stock ticker and phrases like don t fight the tape meaning don t trade against the trend tape reading eventually became obsolete in the 1960s and 1970s with the rise of television and computers but the terms ticker symbol and stock tickers remain in use and traders employ many of the same techniques with more modern technology while the rise of personal computers made old fashioned tape reading obsolete much of the terminology of that time remains in today s trading vernacular such as ticker symbol stock ticker and don t fight the tape modern tape readingmodern tape reading involves looking at electronic order books to analyze where a stock price may be headed unlike stock tickers these order books include non executed trades which provides a higher level of detail into the market at any given time for example a trader may look at a security s order book and see that there are large limit sell orders at a certain price level across multiple exchanges this may indicate that the stock will experience significant resistance at these levels the opposite may be true if there are large limit buy orders below the current price which could indicate strong support at a given price point and give a trader the confidence to buy knowing there s a price floor many brokers provide access to these order books in the form of level ii quotes in advanced cases programmatic traders may use the information when building trading algorithms interactive brokers for example provides a function called reqmktdepth that lets traders stream order book data for analysis 2 these insights can prove extremely helpful when developing modern trading algorithms | |
what is the taper tantrum | the phrase taper tantrum describes the 2013 surge in u s treasury yields resulting from the federal reserve s fed announcement of future tapering of its policy of quantitative easing the fed announced that it would be reducing the pace of its purchases of treasury bonds to reduce the amount of money it was feeding into the economy the ensuing rise in bond yields in reaction to the announcement was referred to as a taper tantrum in financial media understanding taper tantrumin reaction to the 2008 financial crisis and ensuing recession the federal reserve executed a policy known as quantitative easing qe which involves large purchases of bonds and other securities in theory this increases liquidity in the financial sector to maintain stability and promote economic growth stabilizing the financial sector encouraged lending to allow consumers to spend and businesses to invest historically quantitative easing the monetary policy designed to infuse more dollars into the circulation of the economy has been considered only usable as a short term fix because of the danger that could arise from falling dollar values leading to hyperinflation traditional economists would insist that when the federal reserve feeds the economy for too long there are unavoidable consequences tapering which gradually reduces the amount of money the fed pumps into the economy should theoretically incrementally reduce the economy s reliance on that money and allow the fed to remove itself as the economy s crutch however since 2015 the fed has found a variety of ways to infuse cash into the economy without lowering the value of the dollar these new policy tools such as the repurchase window may have ushered in a new chapter in the future study of macroeconomic policy though it will be several years before economists and academics in hindsight will be willing to declare such tools effective or dangerous however investor behavior always involves not just current conditions but expectations of future economic performance and fed policy if the public gets word that the fed is planning to engage in tapering panic can still ensue because people worry that the lack of money will trigger market instability this is particularly a problem the more dependent the market has become on continued fed support | |
what caused the 2013 taper tantrum | in 2013 federal reserve chair ben bernanke announced that the fed would at some future date reduce the volume of its bond purchases in the period since the 2008 financial crisis the fed had tripled the size of its balance sheet from around 1 trillion to around 3 trillion by purchasing almost 2 trillion in treasury bonds and other financial assets to prop up the market investors had come to depend on ongoing massive fed support for asset prices through its ongoing purchases this prospective policy of reducing the rate of fed asset purchases represented a massive negative shock to investor expectations as the fed had become one of the worlds biggest buyers as with any reduction in demand with reduced fed purchases bond prices would fall bond investors responded immediately to the prospect of future decline in bond prices by selling bonds depressing the price of bonds as a result of course falling bond prices always mean higher yields so yields on u s treasuries shot up it is important to note that no actual sell off of fed assets or tapering of the fed s quantitative easing policy had occurred at this point chair bernanke s comments referred only to the possibility that at some future date the fed might do so the extreme bond market reaction at the time to a mere possibility of less support in the future underscored the degree to which bond markets had become addicted to fed stimulus many pundits believed that the stock market could follow suit since the money flowing into the economy from the fed through bond purchases was also widely understood to be supporting stock prices if so this market reaction to the prospect for fed tapering could potentially sink the economy instead the dow jones industrial average djia made only temporary declines in mid 2013 investopedia laura porter | |
why didn t the stock market fall during the taper tantrum | there were many reasons for the stock market s continued health for one following chair bernanke s comments the fed did not actually slow its qe purchasing but instead launched into a 3rd round of massive bond purchases totaling another 1 5 trillion by 2015 secondly the fed professed a strong faith in market recovery boosting investor sentiment and actively managing investor expectations through regular policy announcements once investors realized that there was no reason to panic the stock market leveled out | |
what is tapering | tapering modifies a central bank s monetary expansion policies initiated to stimulate an economy during a program of quantitative easing a nation s central bank may buy asset backed securities from its member banks injecting money into the economy to boost recovery tapering is initiated after the quantitative easing policies have stabilized an economy and may include changing the discount rate or reserve requirements in the united states the federal reserve will also reduce its asset holdings investopedia alex dos diaz | |
when central banks pursue an expansionary policy to stimulate an economy in a recession they promise to reverse their stimulatory policies once the economy has recovered continuing to stimulate an economy with easy money once a recession has eased can lead to inflation and monetary policy driven asset price bubbles | tapering is the first step in the process of either winding down or withdrawing from a monetary stimulus program that has already been executed and deemed successful communicating openly with investors regarding the direction of central bank policy and future activities helps to set market expectations and reduce market uncertainty in the case of quantitative easing the central bank would announce its plans to slow asset purchases and either sell off or allow assets to mature thus reducing the amount of total central bank assets and the money supply central banks can hesitate to pull back on their qe policies due to taper tantrums where investors and financial markets overreact to a reduction in stimulus from the central bank for example announcements of impending central bank tapering have typically been met with sharp rises in government bond yields and drops in equity markets creating an incentive for monetary policymakers to delay plans to unwind their balance sheets to avoid harming the interests of their constituents in the financial sector federal reserve tapering and financial assetsas the covid 19 pandemic emerged in march 2020 the fed implemented an aggressive quantitative easing strategy injecting more than 700 billion in asset purchases and by june 2020 established a qe program to purchase 80 billion in treasury securities and 40 billion in mortgage backed securities per month the fed started tapering its purchases in december 2021 and by the spring of 2021 the economy showed significant strength and a cost of living surge in june 2022 the federal reserve changed its monetary policy direction to manage the threat of rising costs the fed revised its position after two years of an easy money policy ending its policy of low interest rates and significant intervention in the bond market the fed also put in place a plan to reduce its balance sheet of nearly 9 trillion in asset holdings it accumulated in recent years mostly treasury and mortgage backed securities the beginning of the fed s money tightening measures 1 | |
when does tapering begin | the fed implements quantitative easing as one of its tools to stimulate the economy like all economic stimulus programs qe policies are not intended to be permanent and after the desired results of an economic stimulus program have been achieved those policies must be gradually rescinded if a central bank changes its operations too fast it can push the economy into a recession if a central bank never eases its economic stimulus policies there may be an increase in inflation tapering is the period where the stimulus has worked and before an accelerated expansion toward inflation | |
what is the difference between tapering and tightening | tight or contractionary policy is a course of action by a central bank to slow down economic growth constrict spending in an economy that is seen to be accelerating too quickly or curb inflation when it is rising too fast the fed tightens monetary policy by raising short term interest rates through policy changes to the discount rate also known as the federal funds rate the fed may also sell assets on the central bank s balance sheet to the market through open market operations omo tapering refers to the period of reversal between expansionary policy and contractionary monetary policy | |
where was tapering evident in response to the 2007 2008 financial crisis | tapering by the fed followed the massive qe program implemented in reaction to the 2007 08 financial crisis tapering was evident in june 2013 when the former chair of the fed ben bernanke announced that the fed would reduce the number of assets purchased every month as long as economic conditions such as inflation and unemployment were favorable as 2013 drew to a close the federal reserve board concluded that qe which had increased the fed s balance sheet to 4 5 trillion had achieved its intended goal and it was time for tapering to commence the process of tapering would involve making smaller bond purchases through october 2014 2the bottom linetapering is withdrawing from a monetary stimulus program that has been executed and quantitative easing policies have stabilized the economy tapering may include changing the discount rate or reserve requirements and the federal reserve will also reduce its asset holdings | |
what is a target date fund | target date funds are structured to maximize the investor s returns by a specific date generally the funds are designed to build gains in the early years by focusing on riskier growth stocks then they aim to retain those gains by weighting towards safer more conservative choices as the target date approaches target date mutual funds are often selected by investors saving towards retirement but are also used by people working towards a future big expense such as a child s college tuition | |
how a target date fund works | target date funds use a traditional portfolio management methodology to target asset allocation over the term of the fund to meet the investment return objective named by the year in which the investor plans to begin utilizing the assets target date funds are considered to be extremely long term investments for example in july 2017 vanguard launched its target retirement 2065 products given that the funds have a targeted utilization date of 2065 that gives them a time horizon of 48 years a fund s portfolio managers use this predetermined time horizon to fashion their investment strategy generally based on traditional asset allocation models the fund managers also use the target date to determine the degree of risk the fund is willing to undertake target date portfolio managers typically readjust portfolio risk levels annually risk tolerance over timefollowing the initial launch a target date fund has a high tolerance for risk and therefore is more heavily weighted toward high performing but speculative assets at the annual adjustment portfolio managers will reset the allocation of investment categories a target date fund s portfolio mix of assets and degree of risk becomes more conservative as it approaches its objective target date higher risk portfolio investments typically include domestic and global equities lower risk portions of a target date portfolio typically include fixed income investments such as bonds and cash equivalents most fund marketing materials show the allocation glide path that is the shift of assets across the entire investment time horizon the funds structure their glide rate to achieve the most conservative allocation right at the specified target date some target date funds known as through funds will also manage funds to a specified asset allocation past the target date in the years beyond the target date allocations are more heavily weighted toward low risk fixed income investments this is in contrast to other target date funds known as to funds which cease any modifications to asset allocation once the target date is reached today target date funds are only offered as mutual funds there are no equivalent etfs listed at the moment 1advantages and disadvantages of target date fundstarget date funds are popular with 401 k plan investors instead of having to choose several investments to create a portfolio that will help them reach their retirement goals investors choose a single target date fund to match their time horizon for example a younger worker hoping to retire in 2065 would choose a target date 2065 fund while an older worker hoping to retire in 2035 would choose a target date 2035 fund these funds mitigate the need for other assets some financial professionals advise that if you invest in one it should be the only investment in your plan this one and done approach is because additional investments could skew your overall portfolio allocation however after you ve picked a fund you have the ultimate set it and forget it investment of course the autopilot nature of target date funds can cut both ways the predetermined shifting of the portfolio assets may not suit an individual s changing goals and needs people grow and change and so do their needs | |
what if you have to retire substantially earlier than the target date or decide you want to keep working longer also there is no guarantee that the fund s earnings will keep up with inflation | in fact there are no guarantees that the fund will generate a certain amount of income or gains at all a target date fund is an investment not an annuity as with all investments these funds are subject to risk and underperformance furthermore as investments go target date funds can be expensive they are technically a fund of funds fof a fund that invests in other mutual funds or exchange traded funds which means you have to pay the expense ratios of those underlying assets as well as the fees of the target date fund of course an increasing number of funds are no load and overall fee rates have been decreasing still it is something to watch out for especially if your fund invests in a lot of passively managed vehicles why pay double fees on index funds when you could buy and hold them on your own also it s worth bearing in mind that similarly named target date funds are not the same or more specifically their assets are not the same yes all 2045 target date funds will be heavily weighted toward equities but some might opt for domestic stocks while others look to international stocks some might go for investment grade bonds and others choose high yield lower grade debt instruments make sure the fund s portfolio of assets fits your comfort level and own appetite for risk the ultimate autopilot way to investall in one vehicle no need for other assetsa diversified portfoliohigher expenses than other passive investmentsincome not guaranteedpossibly insufficient inflation hedgelittle room for changing investor goals needsexample of target date fundsvanguard is one investment manager offering a comprehensive series of target date funds below we compare the characteristics of the vanguard 2065 vlxvx fund to the characteristics of the vanguard 2025 fund vttvx the vanguard target retirement 2065 fund vlxvx has an expense ratio of 0 08 as of may 31 2024 the portfolio allocation was 89 49 in stocks 9 61 in bonds and 0 90 in short term reserves it holds other vanguard mutual funds to achieve its goals 2it had 54 invested in the vanguard total stock market index fund 36 30 invested in the vanguard total international stock index fund 6 70 invested in the vanguard total bond market ii index fund and 3 invested in the vanguard total international bond ii index fund 2expense ratios eat away at returns passively managed funds will have lower expense ratios than actively managed ones when choosing funds try to align your return goals with your risk tolerance and expenses the vanguard target retirement 2025 fund vttvx has an expense ratio of 0 08 because it matures much sooner than the 2065 fund it is more conservative as of may 31 2024 its portfolio is weighted 52 02 in stocks 47 08 in bonds and 0 90 in short term reserves 3it has allocated 31 50 of assets to the vanguard total stock market index fund 28 80 to the vanguard total bond market ii index fund 21 10 to the vanguard total international stock index fund 12 40 to the vanguard total international bond ii index fund and 6 20 to the vanguard short term inflation protected securities index fund 3both funds invest in almost all the same assets however the 2065 fund is more heavily weighted toward stocks with a relatively smaller percentage of bonds and cash equivalents the 2025 fund has greater weight in fixed income and fewer stocks so it is less volatile and more likely to contain the assets the investor needs to begin making withdrawals in 2025 23can i hold onto a target date fund after the target date yes however it may behave differently depending on the type of target date fund you have a through fund will continue adjusting its asset allocation toward more conservative holdings as time passes a to fund will retain its final asset allocation as of its maturation date indefinitely | |
are target date funds expensive | in general a target date fund may have somewhat of a higher expense ratio compared to a standard mutual fund this is because the target date fund even if it is an index target date fund is essentially a fund of funds that invests in other mutual funds moreover the fund has to rebalance its portfolio regularly to match the glide path so it is more active than a standard index fund that said many target date index funds available today have low expense ratios of 0 10 or lower can i use a target date fund in my 401 k or individual retirement account yes most plan providers today offer access to target date funds however for these to work properly be careful to only use a target date fund for nearly all of your allocations this is because if you allocate money to other investments it may defeat the purpose of the glide path provided in the target date fund | |
what target date fund should i pick if i plan to retire in a year not ending in 5 or 0 | most target date funds are established in 5 year intervals e g maturing in 2030 2035 2040 2045 and so on there is no set rule if you plan to retire in say 2033 you can round up to the 2035 fund or if you have a lower risk tolerance use the nearer term 2030 one you can also choose to put something like 60 of your allocation in the 2035 fund and 40 in the 2030 fund the bottom linetarget date funds are set up to coincide with an investor s retirement the funds start more aggressively in their early years with a portfolio composition primarily geared towards stocks as the target date approaches capital preservation is the key goal due to investors being older in age gradually the composition leans more toward bonds than it did before target date funds can be a great investment option for those not interested in constantly reallocating their portfolio and prefer to reduce risk as they enter their retirement years | |
what is a target market | a target market is a group of people that have been identified as the most likely potential customers for a product because of their shared characteristics such as age income and lifestyle identifying the target market is a key part of the decision making process when a company designs packages and advertises its product | |
how do i define my product s target market | part of creating a new product is envisioning the consumers who will want it a new product must satisfy a need or solve a problem or both that need or problem is probably not universal unless it reaches the level of indoor plumbing more likely it is needed by a subset of consumers such as environmentally conscious vegetarians or science nerds or outdoor enthusiasts it may appeal to a teenager or a middle aged professional a bargain hunter or a snob envisioning your likely target market is part of the process of creating and refining a product and informs decisions about its packaging marketing and placement | |
what are the 4 target markets | market researchers use activity interest and opinion aio surveys to construct psychographic profiles of their target customers marketing professionals divide consumers into four major segments demographic these are the main characteristics that define your target market everyone can be identified as belonging to a specific age group income level gender occupation and education level geographic this segment is increasingly relevant in the era of globalization regional preferences need to be taken into account psychographic this segment goes beyond the basics of demographics to consider lifestyle attitudes interests and values behavioral this is the one segment that relies on research into the decisions of a company s current customers new products may be introduced based on research into the proven appeal of past products | |
what is an example of a target market | each of the four target markets can be used to consider who the customer for a new product is for example there are an estimated 100 000 italian restaurants in the u s clearly they have enormous appeal 1but a corner pizza joint might appeal mostly although by no means entirely to a younger and more budget conscious consumer while an old fashioned white tablecloth place might be dominated by older folks and families who live in the neighborhood meanwhile a newer place down the street might cater to an upscale and trend conscious crowd who will travel a good distance for the restaurant s innovative menu and fancy wine list in each successful case a savvy business person has consciously considered the ideal target market for the restaurant and has tweaked the menu decor and advertising strategy to appeal to that market | |
why are target markets important | few products today are designed to appeal to absolutely everyone the aveda rosemary mint bath bar available for 26 a bar at aveda beauty stores is marketed to the upscale and eco conscious woman who will pay extra for quality 2 cle de peau beaute synactif soap retails for 110 a bar and is marketed to wealthy fashion conscious women who are willing to pay a premium for a luxury product 3 an eight pack of dial soap costs 12 at cvs and it is known to get the job done 4part of the success of selling a good or service is knowing to whom it will appeal and who will ultimately buy it its user base can grow over time through additional marketing advertising and word of mouth that s why businesses spend a lot of time and money in defining their initial target markets and why they follow through with special offers social media campaigns and specialized advertising | |
what are market segments | dividing a target market into segments means grouping the population according to the key characteristics that drive their spending decisions some of these are gender age income level race education level religion marital status and geographic location consumers with the same demographics tend to value the same products and services which is why narrowing down the segments is one of the most important factors in determining target markets for example people who fall into a higher income bracket may be more likely to buy specialty coffee from starbucks instead of dunkin donuts the parent companies of both of these brands need to know that in order to decide where to locate their stores where to stock their products and where to advertise their brand a business may have more than one target market a primary target market which is the main focus and a secondary target market which is smaller but has growth potential toy commercials are targeted directly to children their parents are the secondary market target market and product salesidentifying the target market is an essential part of a product development plan along with manufacturing distribution price and promotion planning the target market determines significant factors about the product itself a company may tweak certain aspects of a product such as the amount of sugar in a soft drink or the style of the packaging so that it appeals more to consumers in its target group as a company s product sales grow it may expand its target market internationally international expansion allows a company to reach a broader subset of its target market in other regions of the world in addition to international expansion a company may find its domestic target market expands as its products gain more traction in the marketplace expanding a product s target market is a revenue opportunity worth pursuing | |
how detailed should a target market be | it depends broadly speaking a product may be designed for a mass market or a niche market and a niche market can be a very small group indeed especially in a product s early introductory phase some carbonated beverages aim for a practically universal market coca cola had to branch out to 200 markets abroad to continue growing its customer base 5 gatorade is owned by pepsi cola but the brand is positioned as a drink for athletes 6 the soda brand poppi which is branded as a healthy sparkling prebiotic soda with real fruit juice gut health and immunity benefits is clearly aimed at a younger healthier and more trend conscious target market 7 | |
what is an example of a target market | consider a casual apparel company that is working to build its distribution channels abroad in order to determine where its apparel will be most successful it conducts some research to identify its primary target market it discovers that the people most likely to buy their products are middle class women between the ages of 35 and 55 who live in cold climates it s reasonable for the company to focus its advertising efforts on northern european websites that have a strong female audience but first the company may consider how its apparel can be most attractive to that target market it may revise its styles and colors and tweak its advertising strategy to optimize its appeal to this new prospective market | |
what is the purpose of a target market | a target market defines a product as well as vice versa once a target market is identified it can influence a product s design packaging price promotion and distribution a product aimed at men won t be packaged in pink plastic a luxury cosmetic won t be sold in a pharmacy an expensive pair of shoes comes with a branded cloth drawstring bag as well as a shoebox all of those factors are signals to the target audience that they have found the right product the bottom lineidentifying the target market is part of the process of creating and refining a new product a target market can be translated into a profile of the consumer to whom a product is most likely to appeal the profile considers four main characteristics of that person demographic geographic psychographic and behavioral | |
what is a targeted accrual redemption note | a targeted accrual redemption note tarn is an exotic derivative that terminates when a limit on coupon payments to the holder is reached target accrual redemption notes tarn have the distinguishing feature of being subject to early termination if the accumulation of coupons reaches a predetermined amount before the settlement date the holder of the note receives a final payment of the par value and the contract ends understanding targeted accrual redemption notes tarns a targeted accrual redemption note is essentially an index linked note that has a set amount of coupons that represent the target cap after the target cap is reached the note will be terminated with the par of the note being paid so there is usually an attractive initial coupon combined with the possibility of getting back the par value relatively fast an index linked note is an investment product that combines a fixed income investment with additional potential returns that are tied to the performance of an equity index such as the s p 500 index aside from these index linked features tarns are similar to inverse floating rate notes where the benchmark may be euribor or a similar rate tarns can also be conceptualized as path dependent options the end user in effect buys a strip of call options while selling a strip of put options with a notional value that is double the calls the contract may include a knock out provision that terminates it if the benchmark reaches a certain level 1foreign exchange tarns or fx tarns are a common form of tarn in which counterparties exchange currencies at a pre determined rate on pre determined dates the amount of currency exchanged varies depending on whether the rate is above or below a set forward price valuation of targeted accrual redemption notes tarns the valuation of targeted accrual redemption notes can be challenging because the redemption timelines are dependent on the coupons received to date once the knock out level is reached the investment is ended and the principal is repaid from an investor s perspective a great initial coupon rate for a time and an early return of capital is an ideal outcome however depending on how the indexed rates perform an investor may be stuck in the investment and see the time value of money erode what was once an attractive shorter term investment generally speaking the value of a note is the present value of the par and coupon payments however there is uncertainty with targeted accrual redemption notes because not all coupon payments will necessarily be received so instead of a linear calculation on present value a tarn requires a simulation of interest rate volatility to assess the probability of triggering the knock out level given the terms of the note tarns tied to volatile benchmarks will necessarily be more difficult to accurately value | |
what is a tariff | most countries are limited by their natural resources and ability to produce certain goods and services they trade with other countries to get what their population needs and demands however trade isn t always conducted in an amenable manner between trading partners policies geopolitics competition and many other factors can make trading partners unhappy one of the ways governments deal with trading partners they disagree with is through tariffs a tariff is a tax imposed by one country on the goods and services imported from another country to influence it raise revenues or protect competitive advantages investopedia madelyn goodnightunderstanding tariffstariffs are used to restrict imports simply put they increase the price of goods and services purchased from another country making them less attractive to domestic consumers a key point to understand is that a tariff affects the exporting country because consumers in the country that imposed the tariff might shy away from imports due to the price increase however if the consumer still chooses the imported product then the tariff has essentially raised the cost to the consumer in another country there are two types of tariffs | |
why governments impose tariffs | governments may impose tariffs for several reasons tariffs can be used to raise revenues for governments this kind of tariff is called a revenue tariff and is not designed to restrict imports for instance in 2018 and 2019 president donald trump and his administration imposed tariffs on many items to rebalance the trade deficit in the fiscal year 2018 customs duties received were 41 6 billion in fiscal year 2019 duties received were 71 9 billion 12governments can use tariffs to benefit particular industries often doing so to protect companies and jobs for example in april 2018 president donald trump imposed a 25 ad valorem tariff on steel articles from all countries except canada and mexico 3 in march 2022 president joe biden replaced the tariff on steel products from the united kingdom with a tariff rate quota of 500 000 metric tons and reached quota deals with several other countries 45this proclamation reopened the trade of specific items with the u k while taking measures to protect domestic u s steel manufacturing and production jobs by making foreign produced goods more expensive tariffs can make domestically produced alternatives seem more attractive some products made in countries with fewer regulations can harm consumers such as a product coated in lead based paint tariffs can make these products so expensive that consumers won t buy them tariffs can also be used as an extension of foreign policy as their imposition on a trading partner s main exports may be used to exert economic leverage for example when russia invaded ukraine much of the world protested by boycotting russian goods or imposing sanctions in april 2022 president joe biden suspended normal trade with russia in june he raised the tariff on russian imports not prohibited by the april suspension to 35 6unintended side effects of tariffstariffs can have unintended side effects advantages and disadvantages of tariffsproduce revenuesopen negotiationssupport a nation s goalsmake a market predictablecreated issues between governmentsinitiates trade warshistory of tariffsin pre modern europe a nation s wealth was believed to consist of fixed tangible assets such as gold silver land and other physical resources trade was seen as a zero sum game that resulted in either a clear net loss or a clear net gain of wealth if a country imported more than it exported a resource mainly gold would flow abroad thereby draining its wealth cross border trade was viewed with suspicion and countries preferred to acquire colonies with which they could establish exclusive trading relationships rather than trading with each other this system known as mercantilism relied heavily on tariffs and even outright bans on trade the colonizing country which saw itself as competing with other colonizers would import raw materials from its colonies which were generally barred from selling their raw materials elsewhere the colonizing country would convert the materials into manufactured wares which it would sell back to the colonies high tariffs and other barriers were implemented to ensure that colonies only purchased manufactured goods from their home countries 78the scottish economist adam smith was one of the first to question the wisdom of this arrangement his wealth of nations was published in 1776 the same year britain s american colonies declared independence in response to high taxes and restrictive trade arrangements 9later writers such as david ricardo further developed smith s ideas leading to the theory of comparative advantage it maintains that if one country is better at producing a specific product while another country is better at producing another each should devote its resources to the activity at which it excels the countries should trade with one another rather than erect barriers that force them to divert resources toward activities they do not perform well according to this theory tariffs drag economic growth even if they can be deployed to benefit specific narrow sectors under some circumstances 10these two approaches free trade based on the idea of comparative advantage on the one hand and restricted trade based on the idea of a zero sum game on the other have experienced ebbs and flows in popularity relatively free trade enjoyed a heyday in the late 19th and early 20th centuries when the idea took hold that international commerce had made large scale wars between nations so expensive and counterproductive that they were obsolete world war i proved that idea wrong and nationalist approaches to trade including high tariffs dominated until the end of world war ii 11from that point on free trade enjoyed a 50 year resurgence culminating in the creation in 1995 of the world trade organization wto which acts as an international forum for settling disputes and laying down ground rules 12 free trade agreements such as the north american free trade agreement nafta precursor of the united states mexico canada agreement usmca and the european union eu also proliferated 13skepticism of this model sometimes labeled neoliberalism by critics who tie it to 19th century liberal arguments in favor of free trade grew however and britain in 2016 voted to leave the european union 14 that same year donald trump won the u s presidential election on a platform that included a call for tariffs on chinese and mexican imports he implemented tariffs on china when he took office but suspended proposed tariffs on mexico 1516critics of tariff free multilateral trade deals who come from both ends of the political spectrum argue that they erode national sovereignty and encourage a race to the bottom regarding wages worker protections and product quality and standards meanwhile the defenders of such deals counter that tariffs lead to trade wars hurt consumers and hamper innovation | |
what is the simple definition of a tariff | a tariff is an extra fee charged on an item by a country that imports that item | |
what is a tariff example | one of the best known tariff examples in the u s is the tea tax implemented by the british on the american colonies that led to the boston tea party 17 | |
how does a tariff work | as an additional charge on an import a tariff works to reroute a buyer s intentions and money away from the country exporting the good the bottom linetariffs have existed in one form or another for centuries trading partners implement them to politically influence a partner protect domestic industries and consumers and further national goals and interests tariffs are not always negative regardless of what you might see on the news they can be a means to open negotiations again between trading partners provide each a chance to voice concerns and even help to stabilize a country s market | |
what is tax accounting | tax accounting is a structure of accounting methods focused on taxes rather than the appearance of public financial statements in short tax accounting is the means of accounting for tax purposes tax accounting is governed by the internal revenue code which dictates the specific rules that companies and individuals must follow when preparing their tax returns tax accounting applies to everyone individuals businesses corporations and other entities even those who are exempt from paying taxes must participate in tax accounting the purpose of tax accounting is to be able to track funds funds coming in as well as funds going out associated with individuals and entities tax accounting principles vs financial accounting gaap in the united states there are two sets of principles that are used when it comes to accounting the first is tax accounting principles and the second is financial accounting or generally accepted accounting principles gaap under gaap companies must follow a common set of accounting principles standards and procedures when they compile their financial statements by accounting for any and all financial transactions 1 balance sheet items can be accounted for differently when preparing financial statements and tax payables for example companies can prepare their financial statements implementing the first in first out fifo method to record their inventory for financial purposes yet they can implement the last in first out lifo approach for tax purposes the latter procedure reduces the current year s taxes payable 2while accounting encompasses all financial transactions to some degree tax accounting focuses solely on those transactions that affect an entity s tax burden and how those items relate to proper tax calculation and tax document preparation tax accounting is regulated by the internal revenue service irs to ensure that all associated tax laws are adhered to by tax accounting professionals and individual taxpayers 3 the irs also requires the use of specific documents and forms to properly submit tax information as required by law hiring a professional tax accountant is optional for an individual but often necessary for a corporation as business taxes are more complicated than personal taxes types of tax accountingfor an individual taxpayer tax accounting focuses solely on items such as income qualifying deductions investment gains or losses and other transactions that affect the individual s tax burden 4 this limits the amount of information that is necessary for an individual to manage an annual tax return and while a tax accountant can be used by an individual it is not a legal requirement meanwhile general accounting would involve the tracking of all funds coming in and out of the persons possession regardless of the purpose including personal expenses that have no tax implications from a business perspective more information must be analyzed as part of the tax accounting process while the company s earnings or incoming funds must be tracked just as they are for the individual there is an additional level of complexity regarding any outgoing funds directed towards certain business obligations this can include funds directed towards specific business expenses as well as funds directed towards shareholders 5while it is also not required that a business use a tax accountant to perform these duties it is fairly common in larger organizations due to the complexity of the records involved even legally tax exempt organizations use tax accounting as they are required to file annual returns even in instances where an organization is tax exempt tax accounting is necessary this is due to the fact that most organizations must file annual returns 6 they must provide information regarding any incoming funds such as grants or donations as well as how the funds are used during the organization s operation this helps ensure that the organization adheres to all laws and regulations governing the proper operation of a tax exempt entity | |
what is the main purpose of tax accounting | tax accounting is used by companies to help them make the proper tax calculations and prepare tax documents in time for filing season | |
what is tax advantaged | the term tax advantaged refers to any type of investment financial account or savings plan that is either exempt from taxation tax deferred or that offers other types of tax benefits examples of tax advantaged investments are municipal bonds partnerships uits and annuities tax advantaged plans include iras and qualified retirement plans such as 401 k s understanding tax advantagedtax advantaged investments and accounts are used by a wide variety of investors and employees in various financial situations high income taxpayers seek tax free municipal bond income while employees save for retirement with iras and employer sponsored retirement plans the two common methods that allow people to minimize their tax bills are tax deferred and tax exempt status the key to deciding which or if a combination of both makes sense for you comes down to when the tax advantages are realized tax deferred accounts allow you to realize immediate tax deductions on the full amount of your contribution but future withdrawals from the account will be taxed at your ordinary income rate 1 the most common tax deferred retirement accounts in the u s are traditional iras and 401 k plans in canada the most common is a registered retirement savings plan rrsp essentially as the name of the account implies taxes on income are deferred to a later date for example if your taxable income this year is 50 000 and you contributed 3 000 to a tax deferred account you would pay tax on only 47 000 in 30 years once you retire if your taxable income is initially 40 000 but you decide to withdraw 4 000 from the account taxable income would be bumped up to 44 000 the secure act made alterations to many of the rules related to tax advantaged retirement plans and savings vehicles like traditional iras and 529 accounts 2tax exempt accounts on the other hand provide future tax benefits because withdrawals at retirement are not subject to taxes since contributions to the account are made with after tax dollars there is no immediate tax advantage 1the primary advantage of this type of structure is that investment returns grow tax free popular tax exempt accounts in the u s are the roth ira and roth 401 k in canada the most common is a tax free savings account tfsa if you contributed 1 000 into a tax exempt account today and the funds were invested in a mutual fund which provided a yearly 3 return in 30 years the account would be valued at 2 427 by contrast in a regular taxable investment portfolio where one would pay capital gains taxes on 1 427 if this investment were made through a tax exempt account growth would not be taxed with a tax deferred account taxes are paid in the future but with a tax exempt account taxes are paid right now however by shifting the period when you pay taxes and realizing tax free investment growth major advantages can be realized investopedia s tax savings guide can help you maximize your tax credits deductions and savings order yours today tax advantaged investmentstax advantaged investments shelter some or all of an investor s income from taxation allowing them to minimize their tax burden municipal bond investors for example receive interest on their bonds for the duration of the bond s life the proceeds from issuing these bonds to investors are used by municipal authorities to fund capital projects in the community to incentivize more investors to purchase these bonds the interest income received by investors is not taxed at the federal level in many cases if the bondholder resides in the same state where the bonds were issued their interest income will also be exempt from state and local taxes 3depreciation also yields tax advantages for individuals and businesses that invest in real estate depreciation is an income tax deduction that allows a taxpayer to recover the cost basis of certain property in the u s the cost of acquiring a land or building is capitalized over a specified number of useful years by annual depreciation deductions 4for example assume an investor purchases a property for 5 million the cost basis after five years the investor has depreciation deductions of 500 000 and their new cost basis is 4 5 million if they sell the property for 5 75 million the investor s realized gain will be 5 75 million 4 5 million 1 25 million the 500 000 deduction will be taxed at the depreciation recapture rate and the remaining 750 000 will be taxed as a capital gain without the tax advantage of the depreciation allowance the entire gain realized from the sale of the property will be taxed as a capital gain 5tax advantaged accountswith regular brokerage accounts the irs taxes investors on any capital gains realized from selling profitable investments however tax advantaged accounts allow an individual s investing activities to be tax deferred and in some cases tax free traditional individual retirement accounts iras and 401 k plans are examples of tax deferred accounts in which earnings on investments are not taxed every year instead tax is deferred until the individual retires at which point they can start making withdrawals from the account withdrawing from these accounts without penalty is allowed once the account holder turns 59 years old 6prior to the passage of the setting every community up for retirement enhancement secure act which was signed into law on december 20 2019 once an account holder turned 70 years they were obligated to begin taking required minimum distributions rmds from their tax deferred retirement accounts under secure individuals have until age 72 before the required minimum distributions kick in in addition the age limit for contributing to a traditional ira was removed allowing working account holders to invest indefinitely similar to a roth ira 7the threshold to begin receiving distributions was changed once again when congress approved and passed the secure act 2 0 in december 2022 individuals must begin taking rmds when they turn 73 on or after jan 1 2023 8 | |
what is traditional ira vs roth ira | traditional iras are tax deferred investment vehicles whereas roth iras are tax exempt in the case of traditional iras the amount you contribute gives an immediate tax advantage as you can deduct this amount from your taxable income while roth iras provide no immediate tax advantage you can not deduct contributions from your taxable income the gains they accrue are tax free upon withdrawal at what age does a roth ira not make sense individuals of any age can contribute to a roth ira unlike traditional iras roth iras do not have mandatory rmds however roth iras do have a five year rule which requires individuals to wait five years following their first contribution to a roth ira to make their first earnings withdrawal this limitation may be a factor to consider when deciding whether to contribute to a roth ira | |
should i contribute to roth or traditional ira first | whether you should contribute to a roth ira or a traditional ira first depends on your future income expectations if you expect your income to be lower at retirement than at the current moment then you should focus your contributions toward traditional iras which provide immediate tax advantages however if you expect your income and thus tax rate to be higher in the future then consider contributing to roth iras first as future withdrawals from these accounts will be tax free the bottom lineroth iras and fsas offer even more tax savings for investors than tax deferred accounts as activities in these accounts are exempt from tax withdrawals and earnings in these accounts are tax free providing a perfect example of a tax advantage 910governments establish tax advantages to encourage private individuals to contribute money when it is considered to be in the public interest selecting the proper type of tax advantaged accounts or investments depends on an investor s financial situation | |
what is tax avoidance | tax avoidance refers to the use of legal methods to minimize the amount of income tax owed by an individual or a business it s generally accomplished by claiming as many deductions and credits as are allowable it may also be achieved by prioritizing investments that have tax advantages such as buying tax free municipal bonds tax evasion relies on illegal methods such as underreporting income and falsifying deductions they re quite different practices understanding tax avoidancetax avoidance is a legal strategy that many taxpayers use to lower their tax bills millions of individuals and businesses use some form of tax avoidance to legally and legitimately cut down how much they owe the internal revenue service irs methods of tax avoidance are also referred to as tax shelters when used in this context 1taxpayers can take advantage of tax avoidance through various credits deductions and exclusions including tax credits and deductions must first be approved by the u s congress and signed into law by the president before they can become part of the u s tax code these provisions can then be used for the benefit and relief of taxpayers 2tax avoidance is built into the internal revenue code irc lawmakers use this tax code to manipulate citizen behavior by offering tax credits deductions or exemptions they indirectly subsidize certain essential services such as health insurance retirement savings and higher education or they may use the tax code to advance national goals such as greater energy efficiency 3tax credits work somewhat differently than tax deductions they re subtracted from what you owe the irs or other tax authorities after you prepare your tax return and figure out what you owe tax deductions are subtracted from your gross income to arrive at your taxable income 3special considerationsthe expanding use of tax avoidance in the u s tax code has made it one of the most complex tax codes in the world its complexity causes many taxpayers to miss out on certain tax breaks because they simply don t understand them taxpayers end up spending billions of hours each year filing tax returns and much of that time is spent looking for ways to avoid paying higher taxes 4families often have a difficult time making decisions about retirement savings and education issues because the tax code can change annually businesses especially suffer the consequences of a tax code that frequently evolves and this can affect hiring decisions and growth strategies proposals to the tax code often attempt to simplify the process by flattening tax rates and removing many tax avoidance provisions proponents of establishing a flat tax rate argue that it would eliminate the need to pursue tax avoidance strategies but opponents call the flat tax concept regressive make sure you save every receipt that may be useful for legal tax avoidance if you re a business owner freelancer or investor types of tax avoidancetaxpaying entities can avoid paying taxes in several ways with the help of the credits deductions and exclusions that make up the u s tax code these are just a few of the tools that taxpayers have at their disposal to take advantage of tax avoidance the irs has reported that 87 3 of taxpayers used the standard deduction rather than itemize their deductions in 2020 5 the standard deduction is 14 600 for single filers in 2024 and 29 200 for married couples filing jointly 6the alternative to claiming the standard deduction is to tally up every itemized tax deductible expense you paid during the tax year and enter them all on schedule a of your tax return you can then claim the total of these deductions instead but this is only advantageous if the total amount is more than the standard deduction you qualify for you d be subtracting less from your taxable income otherwise the tax code doesn t allow you to claim both the standard deduction and to itemize deductions as well you must do one or the other 7saving money for retirement means that you re probably engaging in tax avoidance every individual who contributes to an employer sponsored retirement plan or invests in an individual retirement account ira is engaging in tax avoidance the investor gets an immediate tax break equaling the amount they contribute to a traditional plan each year up to a limit that s updated annually income tax on the money isn t owed until it s withdrawn after the saver retires the retiree s taxable income will be less in the years the contributions reducing taxes owed growth on the money is typically taxed after retirement when withdrawals are made roth plans work differently there s no immediate tax break for making contributions they allow investors to save after tax money so the tax break comes after retirement in the form of tax free savings roth accounts allow the saver to permanently avoid paying income tax on the money their contributions earn over the years subject to some qualifying rules 8the u s tax code allows corporations and high net worth individuals hnwis to move their money to offshore tax havens these are locations that have looser regulations more favorable tax laws lower financial risks and confidentiality going offshore by setting up subsidiaries or bank accounts allows taxpaying entities to avoid paying higher taxes in their home countries 9tax avoidance vs tax evasionpeople often confuse tax avoidance with tax evasion both are ways to avoid paying taxes but tax avoidance is legal and tax evasion is not tax evasion occurs when people underreport or fail to report income or revenue they ve earned to a taxing authority such as the irs you re guilty of tax evasion if you don t report all your income such as if you omit tips or bonuses paid by your employer claiming credits to which you aren t entitled is also considered tax evasion some taxpayers are guilty of tax evasion by not filing their tax returns or not paying their taxes due even if they ve filed returns 10tax evasion is a serious offense entities that are found liable can be fined jailed or both 11 | |
is tax avoidance legal | tax avoidance can be a legal way to avoid paying taxes you can accomplish it by claiming tax credits deductions and exclusions to your advantage corporations often use different legal strategies to avoid paying taxes they include offshoring their profits using accelerated depreciation and taking deductions for employee stock options tax avoidance can be illegal however when taxpayers deliberately make it a point to ignore tax laws as they apply to them doing so can result in fines penalties levies and even legal action | |
what s the difference between tax avoidance and tax evasion | tax avoidance is a legal way for taxpayers to avoid paying taxes they can do so by using the tax credits deductions and exclusions that are part of the tax code to their advantage using these strategies can help them either avoid paying taxes altogether or lower their tax liability tax avoidance can be illegal if a taxpayer abuses these strategies and doesn t follow tax laws tax evasion is the deliberate failure to comply with tax laws taxpayers evade tax assessment and payment of their taxes tax evasion can entail hiding income offshoring income in areas that don t comply with a taxpayer s home country falsifying tax records and inflating expenses tax evasion can result in fines penalties levies and even prosecution | |
what are the types of tax avoidance | taxpayers can use many strategies to avoid paying taxes and they re legal and legitimate options they include taking the standard deduction or itemized deductions contributing to a qualified retirement account claiming tax credits and offshoring profits the bottom linetax avoidance is a very legal way to avoid paying too much in taxes there are strategies in place that you can use to lower your tax liability you can use the standard or itemized deductions to avoid paying excess taxes on your annual income the amount is also considered a tax avoidance strategy if you save for retirement in an ira or 401 k | |
what is a tax base | a tax base is the total value of all of the assets income and economic activity that can be taxed by a taxing authority usually a government it is used to calculate tax liabilities tax liabilities are the portion of the tax base that is collected and they come in many forms including income property capital gains and sales taxes understanding the tax basea tax base is the total value of all assets properties individual income and corporate income in a certain area or jurisdiction to calculate the total tax liability you must multiply the tax base by the tax rate the rate of tax imposed varies depending on the type of tax and the tax base total income tax gift tax and estate tax are each calculated using a different tax rate schedule income as a tax baselet s take personal or corporate income as an example in this case the tax base is the minimum amount of yearly income that can be taxed this is taxable income the internal revenue service irs assesses income tax on both personal income and the net income generated by businesses for example using the formula above we can calculate a person s tax liability say margaret earned 10 000 last year and the minimum amount of income that was subject to tax was 5 000 at a tax rate of 10 her total tax liability would be 500 calculated using her tax base 5 000 multiplied by her tax rate 10 to figure tax liabilities for personal income you use irs form 1040 the federal income tax return for individuals the return starts with total income and then deductions and other expenses are subtracted to arrive at adjusted gross income agi itemized deductions and expenses reduce agi to calculate the tax base and the personal tax rates are based on the total taxable income 3an individual taxpayer s tax base can change as a result of the alternative minimum tax amt calculation under amt the taxpayer is required to make adjustments to the initial tax calculation so additional items are added to the return the tax base and the related tax liability both increase 4as an example interest on some tax exempt municipal bonds is added to the amt calculation as taxable bond income if amt generates a higher tax liability than the initial calculation the taxpayer pays the higher amount factoring in capital gainstaxpayers are taxed on realized gains when assets such as real property or stock investments are sold say an investor owns an asset and it rises in value if they sell the asset for a gain it is a realized capital gain and they will owe taxes if the investor does not sell it that investor has an unrealized capital gain and there is no taxable event assume for example an investor holds a stock for five years and sells the shares for a 20 000 gain since the stock was held for more than one year the gain is considered long term any capital losses reduce the tax base of the gain after deducting losses the tax base of the capital gain is multiplied by capital gain tax rates 5examples of tax jurisdictionsin addition to paying federal taxes taxpayers are assessed taxes at the state and local levels in several forms most investors are assessed income tax at the state level and homeowners pay property tax at the local level the tax base for owning property is the home or building s assessed valuation all but five states also assess sales tax which is imposed on most purchases 6 the tax base for sales tax in this case is the retail price of goods purchased by the consumer | |
what are the 3 tax bases | different tax bases include income assets and economic activity such as sales or purchases in terms of tax systems the internal revenue service irs defines these three tax types by these definitions the u s has a progressive federal income tax system its social security tax and property tax systems are regressive sales taxes are also regressive since everyone pays the same percentage of tax for purchases regardless of income 7 | |
what is a broad or narrow tax base | a tax base may be broad or narrow depending on the number of people within a tax jurisdiction who are subject to a tax a luxury tax for example may be levied only on those who buy yachts or high end cars making it a narrow tax base most state sales taxes are a narrow base they omit necessities like food and medicine to avoid over taxing the poorest residents who pay a disproportionately high sales tax on goods as a percentage of their income the bottom linethere are a variety of tax bases at the local state and federal levels a single individual may have assets or participate in activities in several distinct tax bases for example if you work you pay income taxes placing you within the tax base of the united states if you own a home you re part of the local tax base and are subject to property taxes if you buy a drink your purchase is part of the sales tax base and if that drink is alcoholic your purchase may be part of a sin tax base as well | |
what is a tax benefit | the term tax benefit refers to any tax law that helps you reduce your tax liability benefits range from deductions and tax credits to exclusions and exemptions they cover various areas including programs for families education employees and natural disasters some tax benefits are related to the ability to pay taxes for example the child tax credit and the earned income tax credit eitc recognize the cost of raising a family other tax benefits including mortgage interest and charitable donation deductions are incentives designed to further social policy goals understanding tax benefitstax benefits help individuals and corporations reduce their overall tax bills these benefits are a significant part of the tax regulations and legislation set by local state and federal governments tax benefits such as deductions credits exemptions and exclusions reduce the amount you owe annually to federal and state governments 1on the other hand tax shelters help lower taxes through particular investments these are legal vehicles that provide favorable tax treatment common examples of tax shelters include municipal bonds and employer sponsored 401 k plans 23you must be eligible for tax benefits to claim them for instance to qualify for head of household status you must be unmarried have a qualifying dependent who lives with you and pay more than half of the household expenses for the year 4tax benefits for educational expenses can only be claimed by those who spend money on tuition and other related costs during the tax year 5it makes financial sense to learn about any tax benefits you might be eligible for without the proper knowledge you could end up paying more in taxes than you owe it can be helpful to consult a tax professional such as an accountant to maximize your tax savings types of tax benefitsas noted above tax benefits come in all shapes and sizes we ve highlighted some of the more common ones below a tax deduction reduces your taxable income when you file your annual income tax return you have the option to take the standard deduction or to itemize your deductions itemizing your deductions makes sense if the sum of your qualified expenses is greater than your standard deduction for example if a single taxpayer s itemized expenses total 15 000 they would likely itemize rather than take the 13 850 standard deduction however if the same filer s qualified expenses total just 8 000 they would save money by taking the standard deduction even if you don t itemize you can take certain above the line deductions along with the standard deduction these include deductions for student loan interest traditional individual retirement account ira contributions contributions to health savings accounts and more all these deductions lower taxes by reducing taxable income and possibly lowering your tax bracket say for example that a single filer has 49 000 of taxable income for the 2024 tax year landing them in the 22 marginal tax bracket therefore they would pay 22 on any income over 47 150 the beginning of the 22 tax bracket 6however if they qualify for 2 000 in above the line tax deductions they will be taxed on 49 000 2 000 47 000 giving them a marginal tax rate of 12 for tax year 2024 6tax deductions often reduce the total amount of income earned by businesses most companies use a standard income statement to calculate their taxable obligations with taxation falling on the last line tax credits also save you money but they work differently than deductions a tax credit is applied to the amount of tax you owe after all tax calculations are made for example if you owe 3 000 after taking deductions and calculating taxes with your marginal tax rate a 1 000 credit would reduce your tax bill to 2 000 there are many types of tax credits available for individuals and businesses for individuals some of the most common tax credits include the child tax credit the eitc and the premium tax credit 91011refundable tax credittax credits are either refundable or non refundable a refundable tax credit results in a refund check if the tax credit exceeds your tax bill for example say you apply a 3 400 tax credit to your 3 000 tax bill your bill would be reduced to zero and you would receive the remaining portion of the credit as a refund in this case that refund would be 400 non refundable tax credita non refundable tax credit does not result in a refund because it only reduces the tax owed to zero using the example above if the 3 400 tax credit were non refundable you would owe nothing to the government but would forfeit the 400 that remains after the credit is applied some examples of non refundable tax credits include the saver s credit adoption credit child care credit and mortgage interest tax credits tax credits do not impact your taxable income or marginal tax bracket they are subtracted from your tax bill to directly reduce the amount of tax you owe 12the tax cuts and jobs act tcja suspended the personal tax exemption for 2018 through 2025 but some tax exclusions still apply 13tax exclusions usually arise in pretax payments that help you lower your taxable bottom line income excluded for tax purposes usually does not show up on your tax return at all 14one of the most common exclusions is the employer based health insurance payment program if an employer takes healthcare payments on a pretax basis an employee s taxable income is lowered at the end of the pay period which reduces the amount of tax owed 15the annual gift tax exclusion is 17 000 for 2023 and increases to 18 000 for 2024 you can gift up to that amount tax free to as many people as you wish without using up any of your lifetime gift and estate tax exemption 616a tax shelter provides a variety of tax advantages it is generally a vehicle with lower or no tax requirements if you abide by the contracted terms one of the most popular tax shelters is the 401 k that s because income is sheltered from a higher tax rate during investors higher earning years compared to in retirement when their income and tax rate is lower tax havens can also be a type of tax shelter these are often used by businesses companies may incorporate in certain regions to lower their business tax bill some of the most popular tax havens include bermuda the bahamas and the cayman islands 17not all tax shelters are legal and legitimate the irs treats illegal tax shelters as fraudulent activities taxpayers who use illegal tax schemes may face penalties criminal prosecution and prison time 18certain investment products may offer a tax shelter or tax exemption in and of themselves municipal bonds for example are exempt from federal and state taxes if aligned with the state in which the bondholder lives 19other tax advantaged investments include tax free savings accounts municipal mutual funds or exchange traded funds etfs and some life insurance policies | |
what is the difference between a tax credit and a tax deduction | tax credits and tax deductions both reduce the amount of tax you owe but they work in different ways tax credits directly lower the amount of tax you owe while tax deductions decrease your taxable income say you re eligible for a 1 000 tax credit and a 1 000 tax deduction the tax credit reduces your tax bill by 1 000 so if you owed 1 500 in taxes and then took a 1 000 credit your tax bill would be 500 1 500 1 000 on the other hand the tax deduction reduces your taxable income by 1 000 so if you fall into the 22 tax bracket the 1 000 deduction would save you 220 1 000 22 tax credits are more favorable because they save you more money than tax deductions | |
what is the estate tax exemption for 2023 | the estate tax is the amount below which a decedent s estate is not subject to taxes for 2023 the exemption is 12 92 million for 2024 it increases to 13 61 million 6 | |
how much is the earned income tax credit for 2023 | the earned income tax credit is a refundable tax credit for low and moderate income households if you re eligible for the eitc the amount you receive depends on your filing status income and the number of dependents you can claim for 2023 the maximum earned income tax credit is 600 if you have no dependents 3 995 for one dependent 6 604 for two dependents and 7 430 for three or more dependents these amounts increase to 632 4 213 6 960 and 7 830 respectively for 2024 2021the bottom lineit s important to know where you stand with respect to your tax bill even if it isn t tax season keeping on top of the tax benefits that apply to you can spell the difference between a refund and an welcome tax bill or at least breaking even when it comes time to file these benefits range from tax credits and deductions to exclusions and exemptions be sure to speak to a tax professional if you re unsure about how they may work for you | |
for tax year 2024 which applies to taxes filed in 2025 there are seven federal tax brackets with income tax rates of 10 12 22 24 32 35 and 37 these are the same tax brackets that applied for tax year 2023 as well 12 | tax brackets are part of a progressive tax system in which the level of tax rates progressively increases as an individual s income grows low incomes fall into tax brackets with relatively low income tax rates while higher earnings fall into brackets with higher rates although the current brackets were established by the tax cuts and jobs act of 2017 3 income thresholds for individual brackets can be adjusted for inflation for example the irs adjusted the 2023 income limits by about 7 over those for 2022 due to rising inflation 45federal income tax brackets and tax rates for 2024here for comparison are the 2023 federal income tax brackets and tax rates source irs6 | |
what is a marginal tax rate | the united states uses a progressive tax system meaning that it uses a marginal tax rate to determine taxes owed a marginal tax rate determines the tax paid on an additional dollar of income that takes a taxpayer into a higher tax bracket the marginal tax rate increases as a taxpayer s income increases there are different tax rates for various levels of income in other words taxpayers will pay the lowest tax rate on the first bracket or level of taxable income a higher rate on the next level and so on the internal revenue service irs announces any changes to tax brackets and rates annually for tax years 2023 and 2024 there are seven federal tax brackets each is assigned a different rate ranging from 10 to 37 and a range of taxable income per bracket the dollar ranges in each bracket vary for single filers married joint filers and qualifying widow er s married filing separately filers and head of household filers 51 | |
what is an effective tax rate | an effective tax rate is the percentage of tax owed on taxable income it is based on the tax brackets that are set and overseen by the irs as explained above the effective tax rate is lower than the marginal tax rate because the latter breaks down your income into different tiers income at the first tier is taxed at a low rate and each tier above it is taxed at a progressively higher rate than the previous level you can determine what your effective tax rate is by dividing your total tax by your taxable income on your federal tax return on form 1040 divide the figure on line 24 your total tax by the figure on line 15 your taxable income and then multiply that figure by 100 to calculate the effective tax rate for a corporation the total tax is divided by earnings before interest | |
what are the seven tax brackets in the u s | the seven tax brackets in the u s in 2024 are 10 12 22 24 32 35 and 37 the irs maintains these brackets and adjusts them annually for changes in the cost of living because the u s economy usually experiences inflation every year the irs tends to adjust the the tax brackets upward | |
how income tax brackets work | most taxpayers all except those who fall squarely into only the minimum bracket have income that is taxed progressively this means that their income is subject to multiple rates beyond the nominal rate of their tax bracket 7for example an annual income of 100 000 fits the 22 tax bracket for all filing statuses in tax year 2024 however the entire 100 000 isn t taxed at 22 it s taxed at the different rates aligned with the various brackets of income that cover the segments of income up to 100 000 so ultimately a taxpayer pays less than they would if their total income were taxed at 22 7thus a taxpayer s tax bracket does not necessarily reflect the percentage of their income that they will pay in taxes the term for this is the effective tax rate 8 see an example of this in the next section there are numerous online sources to find your specific federal income tax bracket the irs makes available a variety of information including annual tax tables that provide highly detailed tax filing statuses in increments of 50 of taxable income up to 100 000 9other websites provide tax bracket calculators that do the math for you as long as you know your filing status and taxable income your tax bracket can shift from year to year depending on inflation adjustments and changes in your income and status so it s worth checking on an annual basis tax brackets are adjusted each year for inflation using the consumer price index cpi 10example how to calculate your taxeshere s the tax responsibility and the effective tax rate for a single filer with a taxable income of 50 000 in 2023 add the taxes owed in each of the brackets the individual s effective tax rate is approximately 13 of income taxes that you pay on 401 k withdrawals are also based on tax brackets 11 | |
how to reduce your taxes | there are numerous ways to reduce your taxable income for starters you can contribute the maximum to a retirement account at work such as a 401 k and or contribute to a traditional individual retirement account ira if you have the option of a high deductible health insurance plan at work and you open a health savings account hsa hsa contributions made by payroll deduction are excluded from your taxable income a flexible spending account fsa can also help to reduce your taxable income be sure to take advantage of tax credits you are eligible for too tax credits come directly off the amount you owe in taxes to the irs what s known as a dollar for dollar perk examples of tax credits include the child tax credit the earned income tax credit eitc the american opportunity tax credit the lifetime learning credit llc and the saver s credit if you have investments you can also lower your taxes on investment gains if you hold your stocks or other capital assets for more than a year before you sell them thereby turning any gains into long term gains these are taxed at a lower rate than short term capital gains which are taxed at ordinary income rates when the assets sold have been held for a year or less when you sell securities at a loss you can also use tax loss harvesting to offset a capital gains tax liability there are several online tax calculators you can use to estimate a tax refund or determine your tax withholding to ensure you don t have to pay extra taxes or a penalty when you file your tax return 12pros and cons of tax bracketstax brackets and the progressive tax system that they create contrast with a flat tax structure in which all individuals are taxed at the same rate regardless of their income levels higher income individuals are more able to pay income taxes and keep a good living standard low income individuals pay less leaving them more to support themselves tax deductions and credits give high income individuals tax relief while rewarding useful behavior such as donating to charity wealthy people end up paying a disproportionate amount of taxes brackets make the wealthy focus on finding tax loopholes that result in many underpaying their taxes depriving the government of revenue progressive taxation leads to reduced personal savings proponents of tax brackets and progressive tax systems contend that individuals with high incomes are better able to pay income taxes while maintaining a relatively high standard of living in contrast low income individuals who struggle to meet their basic needs should be subject to less taxation proponents stress that it is only fair that wealthy taxpayers pay more in taxes than the poor and the middle class offsetting the inequality of income distribution that makes the progressive taxation system progressive in both senses of the word it rises in stages and it is designed with help for lower income taxpayers in mind supporters maintain that this system can generate higher revenues for governments and still be fair by letting taxpayers lower their tax bill through adjustments such as tax deductions or tax credits for outlays such as charitable contributions the higher income that taxpayers realize can then be funneled back into the economy furthermore tax brackets have an automatic stabilizing effect on an individual s after tax income as a decrease in funds is counteracted by a decrease in the tax rate leaving the individual with a less substantial decrease opponents of tax brackets and progressive tax schedules argue that everyone is equal under the law regardless of income or economic status and that there should be no discrimination between rich and poor they also point out that progressive taxation can lead to a substantial discrepancy between the amount of tax that wealthy people pay and the amount of government representation that they receive some even point out that citizens get only one vote per person regardless of the personal or even national percentage of tax that they pay opponents also claim that higher taxation at higher income levels leads some wealthier individuals to exploit tax law loopholes to find creative ways to shelter earnings and assets they can actually end up paying less in taxes than the less well off depriving the government of revenue for example some american companies have relocated their headquarters abroad to avoid or reduce their u s corporate taxes history of federal tax bracketstax brackets have existed in the u s tax code since the inception of the very first income tax when the union government passed the revenue act of 1861 to help fund its war against the confederacy a second revenue act in 1862 established the first two tax brackets 3 for annual incomes from 600 to 10 000 and 5 on incomes above 10 000 the original four filing statuses were single married filing jointly married filing separately and head of household though rates were the same regardless of tax status 13in 1872 congress rescinded the income tax 14 it didn t reappear until the ratification of the 16th amendment to the u s constitution in 1913 established congress right to levy a federal income tax that same year congress enacted a 1 income tax for individuals earning more than 3 000 a year and couples earning more than 4 000 with a graduated surtax of 1 to 7 on incomes from 20 000 and up 1315over the years the number of tax brackets has fluctuated when the federal income tax began in 1913 there were seven tax brackets in 1918 the number mushroomed to 56 brackets ranging from 6 to 77 16 in 1944 the top rate hit 91 17 but it was brought back down to 70 in 1964 by then president lyndon b johnson 18 in 1981 then president ronald reagan initially brought the top rate down to 50 19then in the tax reform act of 1986 brackets were simplified and the rates were reduced so that in 1988 there were only two brackets 15 and 28 20 this system lasted only until 1991 when the third bracket of 31 was added 21 since then additional brackets have been implemented and we have come full circle and are back to seven brackets state tax bracketssome states have no income tax alaska florida nevada south dakota tennessee texas washington and wyoming 22 new hampshire doesn t tax earned wages but it does tax investment income and interest however it is set to phase out those taxes starting in 2023 bringing the number of states with no income tax to nine by the end of 2024 23in 2023 11 states had a flat rate structure with a single rate applying to a resident s income arizona 2 5 colorado 4 40 idaho 5 8 illinois 4 95 indiana 3 15 kentucky 4 5 massachusetts 5 0 michigan 4 25 north carolina 4 75 pennsylvania 3 07 and utah 4 85 22in other states the number of tax brackets varies from three to as many as nine in california and new york and even 12 in hawaii the marginal tax rates in these brackets also vary considerably california has the highest maxing out at 12 3 22state income tax regulations may or may not mirror federal rules for example some states allow residents to use the federal personal exemption and standard deduction amounts for figuring state income tax in contrast others have their own exemption and standard deduction amounts 22 | |
how do i know which tax bracket i am in | the simplest way to find out what tax bracket you are in is first to know what your filing status is for example single or married filing jointly and second to look at the federal tax brackets issued by the irs and see which bracket your taxable income lands in this is also known as your marginal tax rate for example if your filing status is married filing jointly and your taxable income is 115 000 your tax bracket is 22 1 | |
is it better to file jointly or separately | married couples have the option of filing their tax returns jointly or separately depending on which filing status suits their needs the irs provides tax breaks and credits to couples who file joint returns it also offers them one of the larger standard deductions assuming you don t itemize deductions on your tax return together the benefits tends to make this filing more attractive than filing separately combining incomes for a joint filing can often result in a lower effective tax rate particularly if one spouse earns significantly more than the other spouse however a couple may choose to file separately if for example they have high adjusted gross incomes and significant out of pocket medical expenses filing separately might allow them to meet the irs rule for those costs being a percentage of agi and to therefore get the write off or if a couple is applying for student loans filing separately might allow them to get more aid these are just two of the reasons why filing separately may be beneficial for a married couple | |
how much can i earn before i pay 40 tax | currently there is no 40 tax bracket for 2023 the highest earners in the united states pay a top rate of 37 federal tax on all income made above 578 125 single filers and 693 750 married couples filing jointly 5 | |
how do i calculate my tax bracket | to estimate which tax brackets your earnings will fall under you could do the math yourself by using the tables shown above or by visiting the internal revenue service irs website which provides highly detailed tax filing statuses in increments of 50 of taxable income over 3 000 and up to 100 000 9the bottom linethe federal tax system in the u s is progressive taxpayers who fall into lower brackets pay lower rates than taxpayers in higher brackets in 2023 and 2024 there are seven federal tax brackets with rates ranging from 10 to 37 15unless your taxable income lands you in the lowest tax bracket you are charged at multiple rates as your income rises your entire income is not subject to the rate of the bracket classified for your total income level 5 | |
what is a tax break | the term tax break refers to a benefit the government offers that reduces your total tax liability tax breaks are made possible by tax laws and typically come in the form of credits and deductions other tax breaks include exemptions and excluding certain types of income from your state or federal tax return tax breaks also refer to the favorable tax treatment certain groups receive churches and religious organizations for example are generally exempt from federal state and local income and property taxes among other tax perks 1 likewise people affected by natural disasters receive tax breaks in the form of filing and payment extensions penalty and interest waivers and deductions for casualty and theft losses | |
how tax breaks work | the government provides tax breaks to individual and corporate taxpayers greatly reducing their tax liabilities tax credits deductions exemptions and tax exclusions may enable these savings 2in some cases you don t have to take any action to get a tax break for example life insurance proceeds you receive are generally excluded from your taxable income and you don t have to report them 3 however to take advantage of most tax breaks you must claim them e g tax credits or deductions on your income tax return and meet specific eligibility requirements the personal exemption was a federal tax break up until 2017 under the tax cuts and jobs act the personal exemption deduction is suspended reduced to 0 for tax years 2018 through 2025 4tax breaks can stimulate the economy by increasing the amount taxpayers have to spend and boosting what businesses can invest in their growth moreover tax breaks can promote certain behaviors that benefit society such as replacing gas guzzling cars with modern fuel efficient vehicles as noted above tax breaks are implemented because of state and federal tax laws regulations outline how tax breaks work who qualifies and in some cases how long the tax break lasts the u s congress and the president are responsible for approving federal income tax laws for instance congress approved the tax cuts and jobs act tcja which made significant changes to the u s tax code and was signed into law in 2017 by then president donald trump 5charitable organizations and religious institutions are generally tax exempt this means they are not required to pay federal income taxes 67types of tax breaksa tax credit reduces your tax liability on a dollar for dollar basis this has a greater impact than a deduction which merely reduces the amount of income subject to taxes a tax credit is applied to the amount of tax you owe after all deductions are taken from your taxable income 2 for example if you owe 3 000 in taxes and are eligible for a 1 100 tax credit the amount you owe decreases to 1 900 3 000 1 100 after the tax break is applied tax credits lower your tax bill on a dollar for dollar basis on the other hand tax deductions reduce your taxable income or the amount of income on which your taxes are calculated 2 tax credits are worth more than deductions because they directly reduce your tax bill corporations can also take advantage of tax credits to lower their tax bills the government permits these to benefit workers and the national economy certain credits are implemented regardless of the industry or sector such as business tax credits investment credits and credits for child care for workers they can also be more industry specific such as those in the agricultural energy and mining sectors 8tax deductions are expenses that can be subtracted from your gross income to reduce your taxable income and therefore your tax bill 9 for example a 1 000 tax deduction would lower your taxable income by that same amount the value of the deduction depends on your tax bracket so if you are in the 22 tax bracket that 1 000 tax deduction would save you 220 1 000 22 on your tax bill most taxpayers have the option to take the standard deduction a fixed dollar amount based on your filing status or itemize their deductions on schedule a of form 1040 or 1040 sr here s a rundown of the standard deduction amounts for 2022 and 2023 1011deductions you can itemize include if the sum of the deductions you can itemize exceeds your standard deduction it makes financial sense to itemize a tax exclusion shelters a certain portion of income or type of income from taxation for example you can generally exclude child support payments life insurance proceeds and municipal bond income from your taxable income likewise health insurance premiums your employer pays are exempt from federal income and payroll taxes and the portion of premiums you pay is generally excluded from your taxable income 14another common tax exclusion pertains to home sales if you have a capital gain from selling your main home you can exclude up to 250 000 500 000 if married filing jointly of that gain from your income to qualify you must 15also if you earn income in a foreign country you may be eligible for a tax break through the foreign earned income exclusion the total for an individual is 112 000 for the 2022 tax year and 120 000 for the 2023 tax year 16 | |
what is the difference between tax credits and tax deductions | tax credits and tax deductions both save you money at tax time but credits are more favorable tax credits lower the amount of tax you owe dollar for dollar while tax deductions reduce your taxable income for instance a 1 000 tax credit cuts 1 000 off your tax bill and a 1 000 tax deduction lowers your taxable income by 1 000 so if you fall into the 22 tax bracket a 1 000 deduction would reduce your tax bill by 220 | |
are tax credits better than tax deductions | many tax credits may yield better favorable results compared to tax deductions especially if those tax credits are refundable refundable tax credits can reduce a taxpayer s liability below 0 and result in a refund while tax deductions can only limit the taxability of an individual s income some tax credits actually return a refund | |
what is the annual gift exclusion for 2022 | the annual exclusion for gifts is 16 000 for 2022 and 17 000 in 2023 17 that means you can give up to 16 000 or 17 000 tax free to as many people as you wish without using any of your lifetime gift and estate tax exemption who qualifies for tax breaks broadly speaking many tax breaks favor individuals with lower income many tax deductions and credits phase out as an individuals income increases meaning a person may only receive a partial amount of a tax break eventually taxpayers with income too high will not quality for certain tax breaks in addition many tax breaks are designed for specific economic activity for example to incentive workers to contribute to their retirement accounts certain contributions may receive favorable tax treatment these types of tax breaks can be obtained by simply engaging in the qualification requirement the bottom linethe ultimate goal of many is to reduce their tax liability owed to the federal government individuals corporations and nonprofit entities all leverage tax breaks that exclude some income from being taxable allow for parts of net income to be deductible and permit certain credits to directly reduce taxes owed in general it s advisable to pursue tax breaks to limit your tax exposure | |
what is a tax credit | the term tax credit refers to an amount of money that taxpayers can subtract directly from the taxes they owe this is different from tax deductions which lower the amount of an individual s taxable income the value of a tax credit depends on the nature of the credit certain types of tax credits are granted to individuals or businesses in specific locations classifications or industries investopedia jake shiunderstanding tax creditsfederal and state governments may grant tax credits to promote specific behaviors that benefit the economy the environment or anything else that the government deems important 4for example a tax credit is available that rewards people for installing solar panels for home use other tax credits help offset the costs of child and dependent care education and adoption 5tax credits are more favorable than tax deductions because tax credits reduce tax liability dollar for dollar while a deduction still reduces the final tax liability it only does so within an individual s marginal tax rate 16an individual in a 22 tax bracket for example would save 0 22 for every marginal tax dollar deducted however a credit would reduce the tax liability by the full 1 types of tax creditsthere are three categories of tax credits nonrefundable refundable and partially refundable nonrefundable tax credits are amounts directly deducted from an individual s tax liability until the tax due equals 0 any amount greater than the tax owed which normally results in a refund for the taxpayer is not paid out as a refund hence the term nonrefundable in effect the remaining part of a nonrefundable tax credit that can t be utilized is lost 3nonrefundable tax credits are valid in the year of reporting only expire after the return is filed and may not be carried over to future years 7 because of this nonrefundable tax credits can negatively impact low income taxpayers as they are often unable to use the entire amount of the credit for the 2022 tax year specific examples of nonrefundable tax credits include the 78refundable tax credits are the most beneficial credit because they re paid out in full this means that a taxpayer regardless of their income or tax liability is entitled to the entire amount of the credit beyond a zero amount of tax due so for example if the refundable tax credit reduces the tax liability to below 0 then the taxpayer is due a refund of that specific amount 3one of the most popular refundable tax credits is probably the earned income tax credit eitc the eitc is for low to moderate income taxpayers who earn income through an employer or by working as a self employed individual and meet certain criteria based on income and number of family members 1011the premium tax credit is also refundable it helps individuals and families cover the cost of premiums for health insurance purchased through the health insurance marketplace 12some tax credits are only partially refundable one example is the american opportunity tax credit aotc for postsecondary education students if a taxpayer reduces their tax liability to 0 before using the entire portion of the 2 500 tax deduction the remainder may be taken as a refundable credit up to the lesser of 40 of the remaining credit or 1 000 13the child tax credit was a partially refundable credit but became refundable up to 1 500 in 2022 and 1 600 in 2023 as a result of the tax cuts and jobs act tcja 1415 if a taxpayer had a large enough tax liability the full amount of the child tax credit was 2 000 16this credit increased and became fully refundable as part of the american rescue plan for tax years 2020 and 2021 162021 american rescue plan changesin march 2021 congress passed the american rescue plan which was signed into law by president biden under the plan eligible individuals received up to 1 400 in stimulus checks in addition certain temporary changes were made to the child tax credit for married couples filing jointly with a modified adjusted gross income magi up to 150 000 heads of household with magi up to 112 500 or single filers with magi up to 75 000 17changes were also made to the eitc originally capped at 543 for childless households the maximum earned income tax credit for those same households was 560 for 2022 and 600 for 2023 2122 the bill also expanded eligibility for childless households previously people under the age of 25 and over the age of 65 could not claim the credit the upper limit was eliminated and the lower limit was reduced to 19 i e anyone 19 or older without a child who meets income requirements can claim the eitc 23note a few exceptions students ages 19 to 24 with at least half a full time course load are ineligible former foster children or youths experiencing homelessness can claim the credit as 18 year olds the phaseout percentage was increased to 15 3 for single filers and phaseout amounts were increased to 11 610 24the two eitc changes below are permanent except where noted the american rescue plan measures above including child and child dependent care credits were temporary and applied only to 2021 they revert to their previous forms for 2022 and beyond 27example of a tax creditlet s say that you ve done your calculations and find that you owe the government a 2 000 tax payment for the year but your tax advisor calls with good news you re eligible for a 2 500 refundable tax credit this means that not only will your tax liability be eliminated but you ll also receive a 500 refund | |
should that tax credit have been nonrefundable your financial benefit would have been limited to zero taxes owed you wouldn t receive a refund for the remaining 500 of tax credit | common tax creditshere are some details about several of the common tax credits mentioned earlier for 2022 the child and dependent care credit for expenses is nonrefundable this credit which requires irs form 2441 helps individuals and couples reduce the costs of care for children younger than 13 it s available to those who have to arrange for this care so that they can work or look for employment 28you may also receive the credit if you care for a spouse or a dependent of any age who cannot care for themselves 29for 2022 you may claim up to 3 000 for the care of one dependent or up to 6 000 for two or more the credit ranges from 20 to 35 based on your income 30to qualify for this tax credit your filing status must be single married filing jointly head of household or qualifying widow or widower with a qualifying child 31the lifetime learning credit can help offset the costs of any years of postsecondary education and whether or not you re earning a degree the tax credit can be 20 of up to 10 000 in qualifying expenses related to education or 2 000 for an eligible taxpayer their spouse or their dependent for 2022 the full credit can be claimed if annual income is 80 000 or less for single filers or 160 000 or less for married couples filing jointly 3233the retirement savings contributions credit was created to encourage low and moderate income taxpayers to save for retirement it can offset part of the first 2 000 that workers contribute to individual retirement accounts iras 401 k plans and certain other workplace retirement programs 34it applies to eligible contributions to retirement plans you must be at least 18 years old and not a full time student during the year also you may not be claimed as a dependent on someone else s tax return 35for 2022 the credit is available to those with maximum annual incomes of 34 000 for single filers 51 000 for heads of household and 68 000 for married couples filing jointly the maximum credit is 1 000 for individuals or 2 000 for couples 34tax credit vs tax deductionboth tax credits and tax deductions are a welcome feature of tax time for any taxpayer they both reduce money owed to the government in a given year however they differ in how they do so a tax credit reduces the specific amount of the tax that an individual owes for example say that you have a 500 tax credit and a 3 500 tax bill the tax credit would reduce your bill to 3 000 you won t be able to make the most of nonrefundable tax credits that reduce the amount of taxes you owe to zero and still have dollars left over that amount isn t refundable 2refundable tax credits do provide you with a refund if they have money left over after reducing your tax bill to zero as a result they re considered more valuable than nonrefundable tax credits there are also certain tax credits that result in a refund even if you had no tax liability 36you must meet certain criteria for tax credits so be sure to check with a tax advisor or the information provided by the irs 36a tax deduction reduces the amount of your income that is subject to taxation for example the contributions that you make to a 401 k in a particular year reduce your taxable income by the total amount contributed 2you can choose to take the standard deduction offered to every taxpayer for a single filer it s 12 950 for 2022 and 13 850 in 2023 or you can itemize your deductions it s one or the other so be sure to consider whether individual deductions could save you more than the standard deduction before preparing your taxes 37bear in mind that you ll have to provide documentation for the deductions you itemize whereas the standard deduction is automatic 38here s a quick comparison of the financial benefit offered by a tax credit vs a tax deduction | |
what are the 3 types of tax credits | tax credits can be nonrefundable refundable or partially refundable refundable tax credits are the most beneficial because once they reduce tax liability to 0 the taxpayer receives a refund for any remaining amount of the tax credit 3 | |
how much is a tax credit worth | the amount of the credit depends on the type of credit you qualify for and other factors like your filing status and income tax credits reduce the amount of tax you owe dollar for dollar 27 | |
what is the difference between a tax credit and a tax deduction | tax credits directly reduce the amount of tax you owe while tax deductions reduce your taxable income for example a tax credit of 1 000 lowers your tax bill by that same 1 000 on the other hand a 1 000 tax deduction lowers your taxable income the amount of income on which you owe taxes by 1 000 so for example if you fall into the 22 tax bracket a 1 000 deduction would save you 220 2the bottom linea tax credit is a financial benefit provided by the government it is an amount of money that reduces the dollar amount of taxes owed refundable tax credits provide a refund of the amount of the credit that still exists after reducing taxes owed to zero nonrefundable tax credits allow for no such refund their benefit only extends to a reduced tax liability 27tax deductions differ from tax credits in that they reduce taxable income not the amount of an individual s tax liability 2 | |
what is tax deductible interest | tax deductible interest is a borrowing expense that a taxpayer can claim on a federal or state tax return to reduce their taxable income several types of interest are tax deductible including mortgage interest on a primary or second home student loan interest and interest on some business loans including business credit cards understanding tax deductible interestinterest is the amount of money you pay a lender for the privilege of borrowing money or delaying the repayment of a debt all loans incur interest which the lender may roll into your monthly payment for example you pay back a portion of the principal i e the amount you borrowed plus interest every month with most mortgages on the other hand revolving loans like credit cards accrue interest only on unpaid balances to make certain loans more affordable the irs allows you to deduct several types of interest expenses including not all types of interest are deductible specifically the irs does not allow you to deduct personal interest such as student loan interest tax deductionwhile you can t deduct your student loans you can get a tax break on the interest you pay by claiming the student loan interest deduction generally you can deduct the smaller of 2 500 or the interest you actually paid during the year however the deduction may be gradually reduced phased out and eventually eliminated depending on your filing status and modified adjusted gross income magi 23to claim the deduction you must meet all of the following conditions a qualified student loan is a loan you took out to pay qualified higher education expenses for you your spouse or your dependent the loan can t be from a related person or made under a qualified employer plan additionally the loan must pay for qualified educational expenses for you your spouse or your dependent during an academic period in which the student is enrolled at least part time in a degree program quarters trimesters semesters and summer school sessions count as academic periods qualified expenses include if you paid at least 600 in student loan interest you should receive form 1098 e from your student loan servicer 4the student loan interest deduction is taken as an income adjustment so you don t need to itemize your deductions instead you can enter the allowable amount directly on form 1040 or 1040 sr 5mortgage interest tax deductionyou can deduct the mortgage interest you pay on the first 750 000 375 000 if married filing separately of mortgage debt if you bought the home before dec 16 2017 a higher 1 million 500 000 if married filing separately limit applies the loan must be secured by your main home or a second home according to the irs your main home is where you live most of the time whether that s a house co operative apartment condominium mobile home house trailer or houseboat a second home can include any other residence you own and treat as a second home even if you don t use it during the year however if you rent out the property you must use it for 14 days or at least 10 of the number of days you rent it whichever is greater for the interest to count as qualified residence interest all homes must have sleeping cooking and toilet facilities 6you can deduct home equity loan interest but only if you use the funds to buy build or substantially improve the home that secures the loan 7your lender will send you form 1098 to report qualified mortgage interest and points to claim the tax break you must itemize your deductions on schedule a of your 1040 or 1040 sr form you can also deduct the mortgage interest you pay on a rental property but you report it on schedule e since it counts as a business expense 8watch for changes in what s deductibleinterest deductions are subject to limitations and exclusions which can change from year to year for example taxpayers used to be able to claim the mortgage interest deduction on the first 1 million of mortgage debt for loans originating after dec 15 2017 the allowable debt amount is 750 000 due to the tax cuts and jobs act 9be sure that you understand the rules and confirm your eligibility before claiming any deductions when in doubt consult with a qualified tax professional | |
what is the difference between a tax credit and a tax deduction | tax credits and tax deductions reduce the amount of tax you owe but they work differently tax credits reduce your tax bill while tax deductions reduce your taxable income say you re eligible for a 1 000 tax credit and a 1 000 tax deduction the tax credit lowers your tax bill by 1 000 while the tax deduction reduces your taxable income the amount of income on which you owe taxes by 1 000 of the two tax credits save you more money 10 | |
what interest is tax deductible | you can deduct several types of interest including mortgage interest student loan interest investment interest and business loan interest you must meet specific requirements to qualify for each deduction for example you can deduct up to 2 500 of student loan interest but only if your income is below 75 000 155 000 if you re married filing jointly for tax year 2023 and 80 000 and 165 000 respectively for 2024 311 | |
what is the standard deduction for tax year 2023 | for tax year 2023 the standard deduction is 13 850 for single and married filing separately taxpayers 20 800 for heads of household and 27 700 for married filing jointly filers and surviving spouses 12 for tax year 2024 those figures are 14 600 21 900 and 29 200 13the bottom linetax deductible interest allows you to reduce your taxes by claiming allowable borrowing expenses student loan interest is taken as an income adjustment so you don t need to itemize your taxes to benefit from this tax break however deducting investment interest and mortgage interest requires itemizing your taxes on schedule a given the size of the standard deduction it may not be worth your while to itemize and deduct these costs do the math each year to determine which approach is best for you financially | |
what is a tax deduction | a tax deduction is an amount that you can deduct from your taxable income to lower the amount of taxes that you owe you can choose the standard deduction a single deduction of a fixed amount or itemize deductions on schedule a of your income tax return if the total for your itemized expenses is greater than the standard deduction for your filing status it makes sense to itemize allowable itemized deductions include mortgage interest charitable gifts unreimbursed medical expenses and state and local taxes understanding tax deductionsindividuals can take the standard deduction which nearly doubled under the tax cuts and jobs act or itemize their deductions here s a rundown of the standard deduction amounts for the 2023 and 2024 tax years 23taxpayers at least 65 years old or blind can claim an additional standard deduction for 2023 the amount rose to 1 500 1 850 for single filers and heads of household 4 for 2024 these amounts were changed to 1 550 and 1 950 respectively 5you can take the standard deduction or itemize your deductions you can t do both for the same tax year 6common tax deductionshere are some of the most common tax deductions that you can claim on your federal income tax return most of these deductions should be entered on schedule a of your 1040 but there are some exceptions 17 for example you must use form 8949 and schedule d to report investment losses and form 5498 to record ira contributions 18 contributions to an employer sponsored 401 k retirement account are reflected in your paycheck so you don t need the extra form 19deductions impacted by tcjasome once common tax deductions were eliminated or capped by the tax cuts and jobs act of 2017 tcja you can no longer deduct the following at least until 2025 when the act is due to expire tax deductions for the self employedthe ranks of freelancers and gig workers are growing according to a pew research study more than 16 million americans now identify as self employed 21luckily for them they have retained some of the tax deductions that wage earners lost in the 2017 tax reform law some deductions are complex because you have to determine how much of every expense is business thus deductible and how much is personal and nondeductible some of the most important deductions for the self employed include those for half of your medicare and social security taxes the home office deduction and the health insurance premiums deduction one particularly valuable deduction for self employed people defers taxes on their contributions to retirement plans tax deferred retirement plans including the sep ira the simple ira and the solo 401 k are designed specifically for the self employed solo operators and small business owners 22contributions to traditional iras and qualified plans such as 401 k s are an above the line deduction that means the contribution will reduce your taxable income even if you choose to take the standard deduction instead of itemizing small business tax deductionsbusinesses large and small pay taxes on their profits which is their total receipts minus their total business costs that means recording every single expense and reporting it to the irs some of the top deductions for small business owners include the rules for many of these deductions are complex particularly for shoestring operations vehicle expenses and travel expenses for example must be carefully separated between deductible business use and nondeductible personal or family use tax deductions vs tax creditstax deductions reduce your total taxable income the amount you use to calculate your tax bill on the other hand tax credits are subtracted directly from the taxes you owe some tax credits are even refundable meaning that if the credits reduce your tax bill to below zero you ll get a refund for the difference even if they aren t refundable a tax credit is more valuable than a tax deduction a tax deduction may kick your taxable income down a few notches on the tax tables but a tax credit reduces the tax you owe dollar for dollar example of a tax deductionhere s an example sarah is a single taxpayer in the united states with a gross annual income of 50 000 she wants to optimize her tax situation by considering whether to claim itemized deductions or take the standard deduction for the tax year relevant information for sarah includes sarah s potential total itemized deductions equals 15 500 this is the sum of her mortgage interest salt charitable contributions medical expenses above 7 5 of her agi and business expenses if sarah is filing single in 2024 she should take note that the standard deduction of 14 600 is higher than her potential itemized deduction therefore sarah would want to claim the standard deduction standard deductions vs itemized deductionsgenerally speaking u s taxpayers will choose to itemize their deductions or take the standard deduction depending on which most reduces their taxable income contrary to what many taxpayers may think they might benefit most from the standard deduction because the tcja nearly doubled the standard deduction amount and eliminated or capped many itemized deductions if you itemize you need to keep receipts for eligible expenses throughout the year and organize them into categories at tax time you tally and record the expenses on a schedule a and hold onto the receipts in case you re audited the standard deduction is substantially less work you simply fill in the amount of your standard deduction on line 12a of form 1040 or 1040 sr state tax deductionsmost of the 41 states that impose an income tax follow the format of the federal forms as closely as possible 24 however the states set their own tax rates and standard deductions and they may have additional allowable deductions or different restrictions on deductions some states do not permit taxpayers to itemize state taxes if they take the federal tax deduction in any case it s worth reading your state s tax forms closely to see if there are any additional deductions for which you might qualify for example in new mexico you are exempt from state income tax when you reach age 100 and nevada taxpayers can get a free pack of cards for filing their tax returns 25limits on tax deductionskeep in mind that there are limitations on some deductions for example current federal tax law limits the mortgage interest deduction to a maximum of 750 000 of secured mortgage debt or 1 million if you bought the home prior to dec 16 2017 that 2017 change was a severe blow to the very wealthy and to some not so wealthy residents of the cities with the most expensive homes then there s the limit on the healthcare deduction if you re itemizing healthcare costs the expenses that you paid for yourself your spouse and your dependents must exceed a certain percentage of your adjusted gross income agi to be deductible for your 2023 and 2024 tax return the threshold for medical expenses is 7 5 of agi for all taxpayers 52capital loss carryforwardone additional deduction not included in the standard or itemized tax deductions is the one for capital losses these are recorded on schedule d along with capital gains rather than on schedule a 26a tax loss carryforward is a legal way to rearrange earnings for the taxpayer s benefit you can carry forward individual and business capital losses from previous years you can claim up to 3 000 1 500 if married filing separately in capital losses as a tax deduction as of the 2024 tax year if your losses were greater than that you can carry them forward to the following year or years 27 | |
what are tax deductions | tax deductions are expenses or allowances that reduce a taxpayer s taxable income thereby lowering the amount of income subject to taxation they can include various expenses such as mortgage interest medical expenses charitable contributions and certain business expenses either through itemized deductions or the standard deduction | |
what can i write off on my taxes | there are dozens of tax deductions and credits that can help lower your tax bill some of the more common deductions include those for mortgage interest retirement plan contributions hsa contributions student loan interest charitable contributions medical and dental expenses gambling losses and state and local taxes common credits include the child tax credit earned income tax credit child and dependent care credit saver s credit foreign tax credit american opportunity credit lifetime learning credit and premium tax credit 28 | |
what is a tax deed | the term tax deed refers to a legal document granting ownership of a property to a government body when the owner fails to pay any associated property taxes a tax deed gives the government agency the authority to sell the property to collect the delinquent taxes once sold the property is then transferred to the purchaser these transactions are called tax deed sales and are usually held at auctions understanding a tax deeda property tax is any tax levied on a piece of real property taxes are assessed by the municipal government in which the property is located and paid by the owners of real estate there is an implied understanding that owners of real estate property are responsible for paying property tax assessments the taxes collected are used to fund various municipal programs such as water and sewer improvements law enforcement and fire service education road and highway construction public servants and other services property tax rates vary by jurisdiction 1 | |
when property taxes are left unpaid the taxing authority may sell the property s deed or title and therefore the property to recover the outstanding taxes | the taxing authority usually a county government must go through a series of legal steps in order to acquire a tax deed these steps vary with local and municipal laws but include notifying the property owner applying for the tax deed posting a notice at the property and posting a public notice of sale tax deed salesin a tax deed sale the property with the associated delinquent property taxes is sold the sale takes place through an auction with a minimum bid of the amount of back taxes owed plus interest as well as costs associated with selling the property the highest bidder wins the property the tax deed legally transfers ownership to the purchaser on one condition the new owner must pay the entire amount owed often within 48 to 72 hours or the sale is canceled any amount bid by the winning bidder in excess of the minimum bid may or may not be remitted to the delinquent owner this depends on the jurisdiction the original owner may forfeit this excess amount if they do not claim it within a specified period of time in california for example claims must be filed within one year while the deadline in texas is two years 23 in georgia funds can be claimed up to five years after a tax deed sale at which point a court order is required to retrieve excess funds 4some states have a redemption period during which the original owner may pay back their tax debt and reacquire their former property special considerationswhile some states sell the title to the winning bidder the day of the tax deed sale auction others will allow a redemption period during which the original owner has an opportunity to repay their tax debt and redeem the property if the owner chooses to pay their debt obligations within this period they must pay the winning bidder the amount bid at the auction plus interest a total which can be quite high however if the redemption period passes and the owner still does not reclaim their property deed the highest bidder has a chance to foreclose on the property the redemption period in idaho for example is 14 months while owners in iowa have one year and nine months to redeem their property 56tax deeds vs tax lienstax liens are similar to tax deeds with some subtle differences while tax deeds transfer ownership of the property itself to a new party tax liens are a legal claim against the property when the taxes aren t paid tax liens provide a relatively cheap investment for investors with a guaranteed return liens can cost anywhere from a few hundred to a few thousand dollars and pay simple interest that accrues on a monthly basis the lien process begins when a government body places a lien against a property if its owner defaults on their property taxes these liens prevent owners from doing anything with the property including refinancing or selling it they rather than the property itself are sold off at auction interested parties can invest in these tax liens by bidding for them the return is based on a maximum rate of interest allowed by the municipality |
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