Building a financial foundation
how taxes effect your wealth
TingTing Lu11/21/2015
Financial Concepts 101
The Power of Compound Interest & TAX
TAXES
Taxation on Individuals in U.S
FederalIncome TaxSocial Security(6.2% up to $118,500, 12.4% after)
& Medicare Tax (1.45%)Capital Gains & Dividend Income TaxEstate TaxExcise Tax
State & Local Government Income TaxProperty tax & Sales, use tax
Historical Tax Bracket2013 1985 1960
2013 &2014 Income Tax
Standard or Itemized Deduction? – Use the larger one
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Single $5,950
Married/jointly $11,900
Married/separately $5,950
Head of household $8,700
Standard Deduction: Itemized Deduction: Medical expense (7.5%
AGI) State & Local income tax Personal property tax Home mortgage interest Charity contribution Casualty or theft loss
(10% AGI) Job expenses and more Etc.
Deduction from Gross Income
Educator expenses ($250/person) Health Saving Account(HDHP $6450/
$3250) Moving expense Self-employed health insurance deduction Self employed, Sep, Simple, Qualified Plans,
IRA Student loan Interest ($2500@ $150,000
AGI) Tuition and fees ($4000 deduction, but not
allowed if MAGI exceed $160K)
Individual Income Tax Form 1040
Gross Income- Qualified Deductions (Qualified plans 401k/IRA/SEP/SIMPLE,etc.
-+Business Income or Loss=Adjusted Gross Income(AGI)
- Itemized or Standard Deduction- Personal Exemptions=Taxable Income x Tax Rates (effective rate)=Tentative Tax- Tax Credits & Federal Tax Withholding=Federal Tax Liability (or Refund)
$110,000($50,000+$60,000)+$300(Banking interest)-$20,000(401k$10k each)-$16,000(Business Loss)=$74,300(AGI)
-$17,900(Itemized Deduction)-$11,400(3x$3,800)=$45,000(Taxable Income)$1,740=10%x$17,400$4,140=15%x$27,600=$5,880(Tax)
-$1,000(Child Tax Credits)-$12,000(Federal Tax Withholding)=-$7,120(Federal Tax Refund)
Tax Rate & Government Spending
Gross Public Debt: Total Pct. GDP & Avg. Tax Rate
INTRODUCTION: Historical Tax Rates
Sources: Tax Foundation, Tax Data, U.S. Federal Individual Income Tax Rates History, 1913-2011; Treasury Direct, Historical Debt Outstanding – Annual (1929-2010); U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts Table, Table 1.1.5. Gross Domestic Product (1929-2010); The White House Office of Management and Budget, Historical Tables for 2011-2016. Data includes actual historical data from 1929-2011 and projected data from 2012-2016. For an audience with a basic understanding of the financial
industry. Not intended for use with the general public.
Gross Public Debt: Total Pct. GDP & Avg. Tax Rate
INTRODUCTION: Historical Tax Rates
Sources: Tax Foundation, Tax Data, U.S. Federal Individual Income Tax Rates History, 1913-2011; Treasury Direct, Historical Debt Outstanding – Annual (1929-2010); U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts Table, Table 1.1.5. Gross Domestic Product (1929-2010); The White House Office of Management and Budget, Historical Tables for 2011-2016. Data includes actual historical data from 1929-2011 and projected data from 2012-2016.
Where to Save Money
Tax Advantage PlansPre – Tax
Dollar Contributions
Tax-Deferred Growth
Tax-Advantaged
Distributions Limitation
401k, 403b, 457
IRA, SEP IRA, SIMPLE IRA
Yes Yes No59 ½
70 ½
Roth IRA
Roth 401kNo Yes Yes
Income limit
59 ½
Non-Q Annuity No Yes LIFO 59 ½
529 Plan
ESANo Yes Yes Education
7702
VUL / IULNo Yes Yes Healthy
Employer Sponsored Retirement Plans
401(k): employer-sponsored profit-sharing plans 403(b): public education organizations, some non-
profit employers, Tax Sheltered Annuity plans (TSA) 457: government and certain non-governmental
employers. The key difference is unlike a 401(k) plan, there is no 10%
penalty for withdrawal before the age of 59 1/2.
SEP IRA: Simplified Employee Pension Individual Retirement Account
SIMPLE IRA: Savings Incentive Match Plan for Employees IRA
Tradition retirement plans (401k/403b,IRA etc)
• Tax deductible, tax deferred growth;
• 591/2
• RMD (701/2) ;
• Tax at distribution (principle and return);
• Contribution limit: o 401k/403b: $18,000 ($23,000 if age>50)
o SEP: Min(25% Compensation, $52,000)
o IRA: $5500 ($6500 if age>50)
ROTH (Roth 401k, Roth IRA, Roth Conversion)
Pay tax now, Tax free forever (growth and distribution) Phase-out for Roth IRA: $183,000--
$193,000• Contribution limit: (Combined with
Traditional)o Roth 401k: $18,000 ($23,000 if age>50)
o Roth IRA: $5500 ($6500 if age>50)
IUL vs. S&P 500 Index
Investment Tax
S&P 500 Index Fund, $100K, 1976-2013
Tax Tax Impact:Impact:
35% - 50%35% - 50%
Tax Tax Impact:Impact:
35% - 50%35% - 50%
* 25% income tax rate and 15% capital gain tax rate apply. Assume 5% state tax rate.
The Picture
ReturnReturn
??Risk?Risk?
Tax Tax Now?Now?
Tax Tax
Free?Free?Tax Tax Later?Later?
Save?Save? Fin. Fin. Aid?Aid?
Safety?Safety?
Growth?Growth?
LongevityLongevity
??
Life?Life?Asset?Asset?
LTC?LTC?
Probation?Probation? Tax?Tax?
Family Financial Needs
Emergency Fund 3 to 6 mo. expense
MortgageDown payment – how
much Fixed or Adjusted? 15 or 30 years loan?
Education
fundFinancial AidEFC
529? Prepaid?Retirement
planGrowth/Safety/
Longevity
Health Insurance
Disability
InsuranceLife Insurance How much? What
Type?
Estate Planning Living Trust Irrevocable Trust
Long Term
Care
529 Parents’ Asset
Wall Street Journal Talks About Life insurance
And Don’t Forget…
Mortgage
Business
CAN SAVE YOUR
TAX!
There are Two Tax Systems in the U.S.
One for employees and the other for business owners or self-employed
Deductions as an employee: Deductions as a business owner:
Mortgage Interest
Property Taxes
Medical Expenses ONLY the part that exceeds 7.5% of
your income
Gifts to Charity
IRA Contributions
See IRS code Section 162(a)
“There shall be allowed as a deduction, all the ordinary and
necessary expenses paid or incurred during the taxable
year in carrying on any trade or business.”
Mortgage interest or rent
Depreciation of your vehicle
Loss when you sell a vehicle
State and local income taxes
100% of all medical expenses. Insurance premiums, deductibles, prescriptions, braces, contacts,etc.
Life Insurance
Computers, printers, scanners, VCR.
Any purchases you make for your work, or related to your work.
Cell phones, Internet access, DSL
Children’s allowances – paid as wages can be used for: clothes, presents, college, weddings, food, etc.
SEP retirement contributions
Home insurance, repairs, utilities, furniture.
Travel / vacation expenses
Boats, motor homes or airplanes.
Meals out, theater tickets ( for business use), golf, entertainment, etc.
Parties at home or away.
AND MUCH, MUCH, MORE !!!
Common Deductions for Business OwnersCommon Deductions for Business Owners
32% of GDP comes from self-employed.
96% of inventions started in some ones garage or basement.
In America, we are given the incentive to become entrepreneurs and grow the country’s productivity. By design, even the tax code helps us get started in business, making this “The Land of Opportunity.”
Why Would the IRS Give You These Deductions?Why Would the IRS Give You These Deductions?
... Many Happy Income Tax Returns The majority of Americans will get a tax
refund at more than $2,000 a year, and the key to using it wisely is developing a spending plan for the money before it comes in the mailbox. Creating an Emergency Fund Eliminating Credit Card Debt Buy Life Insurance Saving for Education Saving for Retirement Just Say No to Tax Refunds
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