TAXES
updated 15 Sep 04

1.  Corporate treatment of stocks and bonds: 
Interest on bonds is paid by the firm to bondholders before taxes.  That is, dollars paid to bondholders is subtracted from the firm's profits, and consequently the taxes paid on profits are less than they would have been had interest not been paid out.   From one perspective, this reduction in taxes amounts to a subsidy that the government "pays" to the firm for borrowing money.   Dividends on stocks are paid after taxes.  That implies that there is no reduction in the firm's profits (or taxes) as a result of the payment of dividends.

2.  Federal 1040 for individuals:
a. Ordinary Income for Federal tax purposed has a very specific meaning.  It defines those categories of income that are taxed at the "ordinary" tax rates.   The categories include: wages, salary, tips, interest, and dividends.   Therefore "gross taxable ordinary income" includes the sum of all the above.  As of 2003, dividends, while still classified as "ordinary" income, are taxed at a maximum of 15%.

Federal Taxes on "ordinary income" is calculated by first taking the "gross taxable ordinary income" and subtracting both the "personal exemption" [$3100 for 2004] and the "standard deduction" [$4850 for 2004].  (Some individuals will choose to "itemize" their deductions, rather than take the standard deduction.  The rule of thumb is to use whatever method minimizes the taxes.)  The gross minus the exemptions and deductions leave a "net taxable ordinary income".  The net figure is then applied to the "tax tables" to find the "federal taxes on ordinary income".  The ordinary tax rate table taxes the first block of ordinary income at the lowest rate, the next block of income at a higher rate, and so on.  Note: With the new rule that taxes dividends at a maximum of 15%, dividends should also be deducted from the taxable income prior to calculation of the ordinary tax.  The taxes on dividends may be calculated separately, and those resulting taxes added to ordinary taxes due.

b.  Capital Gains:  Capital gains are a source of wealth accumulation for both the individual and the corporation, but are different than ordinary income (wages, interest, dividends) or corporate profits, and capital gains are taxed differently than those other sources.   Capital gains are currently taxed at an individual's marginal tax bracket, or at 15%, which ever is lower.  Capital losses (negative gains) are netted against any gains for the year for the taxable entity.  Any net capital losses may be "carried back" three years and carried forward fifteen years until depleted.  When using the carry back option, start reducing the gains of three years ago first, because next year, the gains of three years ago will no longer be available to offset losses with this method. 

3.  New Hampshire Interest and Dividend Tax:
The State of New Hampshire underwent a major change in their overall tax structure due to a ruling on school funding a few years ago. They adopted a state-wide property tax, but still have no state income tax (at least not on wages), no sales tax, nor a capital gains tax. They do have an "interest and dividends" tax for individuals, which has been in existence, and basically unchanged, for many years. The model for the interest and dividends tax is as follows:
1. Interest and Dividends are taken from the Federal 1040 form. (There are a few exceptional instruments that are taxed at the Federal level, but exempt from NH taxes.)
2. Every individual receives a $2400 exemption. This amount is deducted from the total interest and dividends found on the Federal 1040.
3. The NH tax is 5% of the amount calculated in step #2.

Sample problem:  Given the tax table below, wages of $88,000, interest of $8500, dividends of $4600, personal exemption of $3100, a standard deduction of $4850, and capital gains of $8000, calculate the following: 
a) Gross taxable ordinary income
b) Total Federal taxes (on ordinary & capital gains)
c) Marginal tax bracket
d) Effective tax rate (actual tax on ord inc/gross ord inc before deductions)
e) NH state taxes

a)  (wages + interest + dividends)
      (88000+8500+4600)=$101,100
b) 1. (total ordinary income) -(personal exemption + std deduction+dividends) ==>  apply to table
        (101100)-(3100+4850+4600)= $88,550
2. tax on first 7150 x .10 = $ 715.00
3. tax on (29050-7150) x .15 = $3285.00
4. tax on (70350-29050) x .25 = $10325.00
5. tax on (88550-70350)x .28 = $5096.00
6. tax on dividends 4600 x .15 = $690
7. total tax on ordinary income is sum of steps 2,3,4,5,6  = $20111.00
8. capital gains x 15%     (8000 x .15) = 1200
9. sum of steps 7 & 8 = $21311.00

c)  The "marginal tax bracket" is the rate at which the last dollar earned is taxed.  In this case, that rate is 28% (See also: step b)5 above)

d)  The "Effective tax rate" on ordinary income is the "actual tax on ordinary income" divided by the "actual gross ordinary income".  In other words: " b)7" divided by "a".  That is, 20111 / 101100 = 19.8922%

e) NH taxes due on interest and dividends is 5% after a $2400 exemption, or
     [(8500+4600)-2400] x .05 =$535

Tax Table from Federal 1040 for single individuals for 2004:
    $0  -   7,150     10% 
 7,150  -  29,050     15
29,050  -  70,350     25
70,350  - 146,750     28
146,750 - 319,100     33
319,100 - and up      35
Capital Gains taxed @ max 15%
Dividends taxed @ max 15%

See also : oz.plymouth.edu/~harding/Fin/taxes.xls for calculations