We realize any discussion of income tax can be PTSD triggering. We’ll try to be gentle.
When you pay your income tax, you pay a little at a time (assuming you work as a standard W2-style employee; if you drive for Uber or write mystery novels, you might not relate to this part). Your paycheck comes and a portion of your wages has been withheld. When mid-April rolls along and income taxes are due, you’ve basically paid it. You might owe a little or get a little back, but you essentially pay as you go.
Corporations do things differently. They generally pay in chunks, quarterly or annually. So there can be lag in time between when something taxable happens...and when the company actually sends money in.
That’s where deferred tax comes into play. It represents the amount owed that hasn't been paid yet. The funds have to be set aside on the company’s books, because it’s not really the company’s money at that point. The money's now just waiting to go to the government.
Related or Semi-related Video
Finance: What is a Contingent Deferred S...10 Views
Finance a la shmoop. What is a contingent deferred sales charge? Urgh, mouthful all
right well when you buy any flavor of mutual fund you're paying fees that go [Selection of ice creams with mutual fund labels]
to your broker. How you pay these fees which are called loads or commissions,
depends on the type of mutual fund you have and the way you're buying it. [Table of mutual fund types and share types]
A-shares have a front end load. They're the traditional format in which the sale
of a mutual fund gets commissioned. Meaning you pay your fees to the selling
broker when you buy. So on an individual share sale like at a net asset value in
a mutual fund well you might pay $14.68 for a [The price is highlighted]
share of that mutual fund but net of commission well you start out
compounding your investment at a value of 14 dollars and 37 cents like you paid [The compounded investment is highlighted]
31 cents there in commission. All right next up B-shares, well B-shares carry
what is called a contingent deferred sales charge. That's fancy nomenclature
for quote no-load unquote kinda-sorta in fact what's going on is that the load or [Money going from you to the mutual fund]
commission is paid by the management company responsible for buying and [Money going from the management company to the broker]
selling shares inside of the mutual fund rather than by an upfront sales charge.
Like each year they're essentially paying off the broker his commission for [The management company paying the broker]
selling you that share of the fund, so your fee structure when you pay your
commission upfront might be that the fund costs you one percent a year to be
managed but if you opt for B shares with no commission upfront your annual
fee might be something close to 1.5 percent per year and as long as you hold [The annual fees of each share type are shown]
the mutual fund well say eight years or more, well then you will be
considered to have paid your commission in the form of the extra half a percent [Chart showing the comission prices of both share types being the same after 8 years]
per year that you were charged in these forms of B-shares and if you do the math
you're likely getting a way better deal to just pay your commission upfront and
take the lower fee going forward and remember that contingent thing in there? [The word contingent is circled in the video question]
Well the no-load status of your fund is contingent on you owning
the fund long enough so that the high management fees each year can then go to [Management company paying the broker each year]
pay off the broker if you sell your fund early well then you'll be charged extra
as you exit right. Remember that over time the stock market goes up a lot
usually so why would you want to pay a percentage of your likely increasing [Stock price chart going up]
asset-based annually in the form of higher fee structures rather than lower
fee structures year after year yeah usually financially this doesn't make [Mutual fund performance chart showing increasing value]
sense. So the term here revolves around the notion that your sales charge ie
your commission will have been deferred under the B share structure and the [Deferred stamp]
amount you pay is contingent upon how long you hold the shares and pay the
likely much higher fees annually rather than just biting the bullet up front.
Just as in baseball there's no free lunch in the land of mutual fund buying. [Waiter bring the bill for a guys food]
Yeah, bottom line, do the math.
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