Breed's Hill Newsletter

Breed's Hill Newsletter Planning Your Financial Future Federal Income Tax: How Did We Get Here? Breed's Hill Wealth April 16, 2019 was an The 16th Amendment important day for many of Management However, it was not until 1913 with the adoption us. But do you know of the 16th Amendment to the Constitution, that Dan Novotny, CRPC®,CFS® why? It was Tax Freedom the income tax became a permanent fixture in Investment Advisors Day — the day when the the American tax system. Congress now had Kirk Tassell, CFP® average American the authority to tax income of both individuals theoretically earned 301 North Park Avenue, Suite A and corporations. It didn't take the IRS long to enough to pay his or her Winter Park, FL start inundating us with forms, beginning in tax obligations for the 800-599-5077 1914 with the introduction of the first income tax year. According to the Tax Foundation, 800-599-0338 form, the dreaded Form 1040. Enactment of the Americans will pay $3.4 billion in federal taxes Revenue Act of 1916 introduced tax rates and [email protected] in 2019, more than they spend on food, income scales. www.BreedsHillWM.com clothing, and housing combined.* But it wasn't always this way. In fact, income taxes are a Tax rates fairly new development in the overall history of Here's a sobering fact: In 1913, the top federal America. So how did we get to this point? income tax bracket was 7% on all income over In the beginning... $500,000, and the lowest tax bracket was 1%. During the Great Depression, Congress raised The United States was founded, in part, on the the highest tax bracket to 63%. Wars can be premise that colonists didn't want to pay taxes expensive, as evidenced by the jump in the without representation, which led to the famous highest tax rate to 94% during World War II. In tossing of tea into the Boston Harbor and the 2018, the highest income tax rate was lowered American Revolution. However, not long after to 37%. the colonies gained their freedom from England, Congress passed the Stamp Act of Trying to get it right 1797, which essentially was our nation's first Over the years, there have been frequent estate tax. Otherwise, from the early 1790s to attempts to reform the tax law in some manner. 1802, the U.S. government was supported by We've seen the adoption of the alternative taxes on such items as spirits (alcohol, not the minimum tax, Social Security tax, taxes on ghostly kind), sugar, tobacco, and corporate cigarettes and alcohol, gasoline taxes, aviation bonds. taxes, property taxes, telecommunication taxes, Wars played a big part in the history of taxation not to mention state and local taxes. To quote in this country. To fund the War of 1812, Will Rogers, "The difference between death and Congress taxed sales of gold, silverware, taxes is death doesn't get worse every time jewelry, and watches. In 1817, tariffs on Congress meets." imported goods provided the main source of Tax laws are always changing and will likely revenue to run the government. remain a political hot potato. Only time will tell With the onset of the Civil War, Congress what changes are ahead, but there is no doubt enacted the nation's first income tax law, the that through taxation, what the government Revenue Act of 1861, which included a flat tax giveth, it inevitably taketh back again. September 2019 of 3% on annual incomes exceeding $800 to *Tax Freedom Day 2019 was April 16, as calculated Five Retirement Lessons from Today's help pay for the costs of the war. That tax law by the Tax Foundation, taxfoundation.org. Retirees was repealed and replaced by the Revenue Act Social Security: Shoring Up America's Safety of 1862, which established the Office of the Net Commissioner of Internal Revenue (forerunner When should I file the FAFSA? to the Internal Revenue Service), levied excise taxes on most goods and services, and How can I teach my high school student the replaced the flat tax with a progressive tax. importance of financial literacy?

Page 1 of 4 See disclaimer on final page Five Retirement Lessons from Today's Retirees Each year for its Retirement Confidence Estimating retirement age is one area where Survey, the Employee Benefit Research workers may want to hope for the best but Institute (EBRI) surveys 1,000 workers and prepare for the worst. 1,000 retirees to assess how confident they are Lesson 3: Income is largely a result of in their ability to afford a comfortable retirement. Once again, in 2019, retirees expressed individual savings efforts stronger confidence than workers: 82% of Even though 64% of current retirees have retirees reported feeling "very" or "somewhat" defined benefit or pension plans, an even larger confident, compared with 67% of workers. A percentage say they rely on current savings closer look at some of the survey results and investments, and more than half rely on reveals various lessons today's workers can income from IRAs and/or workplace plans. learn from current retirees. Current workers are much less likely to have Current sources of retiree income defined benefit or pension plans, so it is even EBRI consistently finds that more important that they focus on their own setting a savings goal Let's start with a breakdown of the percentage savings efforts. increases the level of of retirees who said the following resources Fortunately, workers appear to be recognizing confidence among today's provide at least a minor source of income: workers. Despite that fact, this fact, as 82% said they expect their just 42% of survey • Social Security: 88% workplace retirement savings plan to be a respondents have tried to • Personal savings and investments: 69% source of income in retirement, with more than determine a total retirement half saying they expect employer plans to play • Defined benefit/traditional pension plan: 64% savings goal, and less than a "major" role. one-third have tried to • Individual retirement account: 61% calculate how much they Lesson 4: Some expenses, particularly may need for medical • Workplace retirement savings plan: 54% health care, may be higher than expenses. Of those who • Product that guarantees monthly income: expected have calculated a total 33% savings goal, 34% have While most retirees said their expenses were found they will need $1 • Work for pay: 25% "about the same" or "lower than expected," million or more to retire Lesson 1: Don't count on work-related approximately a third said their overall comfortably. earnings expenses were higher than anticipated. Nearly Source: 2019 Retirement four out of 10 said health care or dental Confidence Survey, EBRI Perhaps the most striking percentage is the last expenses were higher. one, given that 74% of today's workers expect work-related earnings to be at least a minor Workers may want to take heed from this data source of income in retirement. Currently, just and calculate a savings goal that accounts one in four retirees works for pay. specifically for health-care expenses. They may also want to familiarize themselves with what Lesson 2: Have realistic expectations Medicare does and does not cover (e.g., dental for retirement age and vision costs are not covered) and think Building upon Lesson 1, it may benefit workers strategically about a health savings account if to proceed with caution when estimating their they have the opportunity to utilize one at work. retirement age, as the Retirement Confidence Lesson 5: Keep debt under control Survey consistently finds a big gap between workers' expectations and retirees' actual Just 26% of retirees indicated that debt is a retirement age. problem, while 60% of workers said this is the case for them. Unfortunately, debt can hinder In 2019, the gap is three years: Workers said retirement savings success: seven in 10 they expect to retire at the median age of 65, workers reported that their non-mortgage debt whereas retirees said they retired at a median has affected their ability to save for retirement. age of 62. Three years can make a big Also consider that 32% of workers with a major difference when it comes to figuring out how debt problem were not at all confident about much workers need to accumulate by their first having enough money to live comfortably in year of retirement. Moreover, 34% of workers retirement, compared with just 5% of workers reported that they plan to retire at age 70 or who don't have a debt problem. older (or not at all), while just 6% of current retirees fell into this category. In fact, almost As part of their overall financial strategy, 40% of retirees said they retired before age 60. workers may want to develop a plan to pay The reality is that more than four in 10 retirees down as much debt as possible prior to retired earlier than planned, often due to a retirement. health issue or change in their organizations.

Page 2 of 4, see disclaimer on final page Social Security: Shoring Up America's Safety Net Ever since a legal secretary named Ida May long-range revenue shortfall (16.05% if the Fuller received the first Social Security increase started in 2035) retirement check in 1940, Americans have been • Raising or eliminating the ceiling on wages counting on Social Security to provide much- currently subject to Social Security payroll needed retirement income. For many older taxes ($132,900 in 2019) Americans, Social Security is their main source of guaranteed retirement income — income that • Raising the full retirement age beyond the continues throughout their lifetimes and is currently scheduled age of 67 (for anyone indexed for inflation every year (in 2019, the born in 1960 or later) cost-of-living adjustment, or COLA, was 2.8%). • Reducing future benefits — to address the long-term revenue shortfall, the trustees have Social Security provides more than just noted that scheduled benefits would have to retirement income, though. It also provides be immediately and permanently reduced by disability and survivor insurance benefits. About about 17% for all current and future Future projections 62 million people — more than one in six U.S. beneficiaries, or by approximately 20% if In 2019, the trustees of Social residents — collected some type of Social reductions were applied only to those who Security reported that the Security benefit in 2018, with approximately initially become eligible for benefits in 2019 or Old-Age and Survivors 80% of these recipients receiving Social Insurance (OASI) trust fund is later Security retirement or survivor benefits.1 projected to run out in 2034. At • Changing the formula that is used to calculate that time, payroll tax revenue How Social Security works alone would be sufficient to pay benefits 77% of scheduled benefits. Social Security is a pay-as-you-go system, • Changing the formula that is used to calculate which means that payments from current the annual cost-of-living adjustment for workers (in the form of payroll taxes) fund benefits benefits for current beneficiaries. The payroll tax rate for Social Security is 12.4%, with 6.2% Understand your retirement benefits paid by the employee and 6.2% paid by the The amount you'll receive from Social Security employer (self-employed individuals pay the is based on the number of years you've worked, entire 12.4%). These payroll taxes are the amount you've earned over your lifetime, deposited into the Old-Age and Survivors and the age when you file for benefits. Your Insurance (OASI) trust fund (for retirement and benefit is calculated using a formula that takes survivor benefits) and the Disability Insurance into account your 35 highest earnings years, (DI) trust fund (for disability payments). but you don't need to work for that long to Because of demographic and economic factors, qualify for retirement benefits. Generally, you including higher retirement rates and lower birth need to have earned a minimum of 40 work rates, there will be fewer workers per credits, which is about 10 years of work in a job beneficiary over the long term, worsening the covered by Social Security. If you haven't strain on the trust funds. This year, the trustees worked long enough to qualify on your own, you of Social Security reported that the OASI trust may qualify for spousal benefits based on your fund is projected to run out in 2034. After that, spouse's work record. A spousal benefit payroll tax revenue alone would be sufficient to claimed at your full retirement age is generally pay 77% of scheduled benefits. equal to 50% of the primary worker's full benefit. Ideas for reform You can get an estimate of your future Social There has been little national consensus by Security retirement benefits by visiting the policymakers on how to deal with Social Social Security website at ssa.gov and using Security's looming demographic challenges. the Retirement Estimator tool or by viewing Meaningful reform will require broad bipartisan your Social Security Statement. Your support, and the trustees have urged Congress personalized statement contains a detailed to address Social Security's challenges sooner record of your earnings history, as well as rather than later, so that solutions will be less estimates of the retirement, survivor, and drastic and can be implemented gradually, disability benefits you can expect at different lessening the impact on the public. ages. To view your statement online, you'll first Some Social Security reform proposals on the need to register. If you haven't registered table include: online, you'll receive your Social Security Statement in the mail every year if you are age • Raising the current Social Security payroll tax 60 or older and not yet receiving benefits. rate — according to the 2019 trustees report, an immediate and permanent payroll tax 1 Top Ten Facts About Social Security, Center on increase to 15.1% (up from the current Budget and Policy Priorities, August 14, 2018 12.4%) would be necessary to address the

Page 3 of 4, see disclaimer on final page Breed's Hill Wealth When should I file the FAFSA? Management The FAFSA, which stands for In order to file the form, you'll need to create an Dan Novotny, CRPC®,CFS® Free Application for Federal FSA ID if you haven't done so already (be sure Investment Advisors Student Aid, is the federal to follow the online instructions). You can save government's financial aid time and minimize errors on the FAFSA by Kirk Tassell, CFP® application. The FAFSA is a using the built-in IRS Data Retrieval Tool, which 301 North Park Avenue, Suite A prerequisite for federal student loans, grants, electronically imports your tax data. Winter Park, FL and work-study. In addition, colleges typically Even if you don't expect your child to qualify for 800-599-5077 require the FAFSA before distributing their own need-based aid, you still might consider 800-599-0338 need-based aid and, in some cases, submitting the FAFSA. All students attending [email protected] merit-based aid. college at least half-time are eligible for federal www.BreedsHillWM.com For the 2020-2021 school year, the FAFSA can unsubsidized Direct Loans regardless of be filed as early as October 1, 2019. Whether financial need. So if you want your child to take you have a senior in high school or a returning out a loan (or your child needs to do so), you'll The accompanying pages have college student, it's a good idea to file the need to file the FAFSA. (Unsubsidized Direct been developed by an independent FAFSA as early as possible to increase your Loan amounts are capped each year: $5,500 third party. Commonwealth child's chances of getting financial aid, because freshman year, $6,500 sophomore year, and Financial Network is not some aid programs operate on a first-come, $7,500 junior and senior years.) responsible for their content and first-served basis. (For high school seniors who Keep in mind that you'll need to resubmit the does not guarantee their accuracy haven't yet been accepted at a particular or completeness, and they should FAFSA each year that you want your child to be college, you can list all the schools your child considered for aid. Fortunately, renewal not be relied upon as such. These has applied to on the form.) materials are general in nature and FAFSAs take less time to complete. do not address your specific The 2020-2021 FAFSA relies on your family's situation. For your specific current asset information and two-year-old investment needs, please discuss income information from your 2018 tax return. your individual circumstances with The form is available online at fafsa.ed.gov. your representative. Commonwealth does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal How can I teach my high school student the importance advice. Securities and advisory of financial literacy? services offered through Even though your child is just Show them the numbers. Use an online Commonwealth Financial Network, in high school, he or she may calculator to demonstrate the concept of Member FINRA/SIPC, a still have to deal with certain long-term investing and the power of compound Registered Investment Advisor. financial challenges. Whether interest. Your children may be surprised to see Fixed insurance products and this involves saving for an important purchase how fast invested funds can accumulate, services offered through Breed's like a car or learning how to use a credit card especially when you match or contribute an Hill Wealth Management. responsibly, it's important for your high schooler additional amount each month. to have a basic understanding of financial Let them practice. Let older teens become literacy concepts in order to manage his or her responsible for paying certain expenses (e.g., finances more effectively. clothing and entertainment). The possibility of While financial literacy offerings in schools have running out of their own money might make increased in popularity, a recent study reported them think more carefully about their spending that only 17 states require high school students habits and choices. It may also encourage them to take a personal finance course before they to budget their money more effectively. 1 graduate. Here are some ways you can teach Cover the basics. By the time your children high school students the importance of financial graduate from high school, they should at least literacy. understand the basic concepts of financial Advocate saving. Encourage your children to literacy. This includes saving, investing, using set aside a portion of any money they receive credit responsibly, debt management, and from an allowance, gift, or job. Be sure to talk protection planning with insurance. about goals that require a financial 1 Survey of the States, Council for Economic commitment, such as a car, college, and travel. Education, 2018 As an added incentive, consider matching the funds they save for a worthy purpose.