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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