Download Gross Public Debt: Total Pct. GDP & Avg. Tax Rate

BUILDING A FINANCIAL
FOUNDATION
HOW TAXES EFFECT YOUR WEALTH
TingTing Lu
11/21/2015
Financial Concepts 101
The Power of Compound Interest & TAX
TAXES
Taxation on Individuals in U.S
Federal
Income Tax
Social Security(6.2% up to $118,500, 12.4% after)
& Medicare Tax (1.45%)
Capital Gains & Dividend Income Tax
Estate Tax
Excise Tax
State & Local Government
Income Tax
Property tax & Sales, use tax
Historical Tax Bracket
2013
1985
1960
2013 &2014 Income Tax
Standard or Itemized Deduction?
– Use the larger one

Standard Deduction:
Single
Married/jointly
$5,950
$11,900

Itemized Deduction:




Married/separately
$5,950



Head of household $8,700

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.
17
Deduction from Gross Income






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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
INTRODUCTION: HISTORICAL TAX RATES
Gross Public Debt: Total Pct. GDP & Avg. Tax Rate
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.
INTRODUCTION: HISTORICAL TAX RATES
Gross Public Debt: Total Pct. GDP & Avg. Tax Rate
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 Now
Tax Later
Tax Free
Tax Advantage Plans
401k, 403b, 457
IRA, SEP IRA,
SIMPLE IRA
Pre – Tax
Dollar
Contributions
TaxDeferred
Growth
TaxAdvantaged
Distributions
Limitation
Yes
Yes
No
59 ½
70 ½
Roth IRA
Roth 401k
No
Yes
Yes
Income limit
59 ½
Non-Q Annuity
No
Yes
LIFO
59 ½
529 Plan
ESA
No
Yes
Yes
Education
7702
VUL / IUL
No
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 Impact:
35% - 50%
* 25% income tax rate and 15% capital gain tax rate apply. Assume 5% state tax rate.
The Picture
Estate
Planning
Protection
Investment
Asset?
LTC?
YOU and
your
family
Safety?
Tax
Saving
Tax Later?
Retirement
College
Funding
Family Financial Needs
Emergency Fund
Health Insurance
3 to 6 mo. expense
Mortgage
Down payment – how much
Fixed or Adjusted?
15 or 30 years loan?
Education fund
Financial Aid
EFC
529? Prepaid?
Retirement plan
Growth/Safety/Longevity
Disability Insurance
Life Insurance
How much? What Type?
Long Term Care
Estate Planning
Living Trust
Irrevocable Trust
529 Parents’ Asset
Includable
Excludable
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:
 Mortgage Interest
 Property Taxes
 Medical Expenses
ONLY the part that exceeds 7.5% of your
income
 Gifts to Charity
 IRA Contributions
Deductions as a business owner:
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.”
Common Deductions for Business Owners
 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
 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.
 Computers, printers, scanners, VCR.
 Meals out, theater tickets ( for
business use), golf, entertainment, etc.
 Any purchases you make for your
work, or related to your work.
 Parties at home or away.
 Cell phones, Internet access, DSL
AND MUCH, MUCH, MORE !!!
Why Would the IRS Give You These Deductions?
 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.”
... Many Happy Income Tax Returns
38

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