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There are many websites on the Internet today that gives much needed income tax help for those who have no idea of what’s going on during tax time. Income tax is a tax paid on income, unfortunately no matter how little it is. It’s paid by employees and people who are self-employed and may also be payable if you are not working but you have an income, such as a retirement pension or an occupational pension. Not all types of income are taxable and it will seldom be the case that all of your income is taxed. There is no minimum age at which a person becomes liable to pay income tax. What matters is your income. If this is below a certain level, no tax is payable. There is actually no single definition in tax law of income. Income tax law divides various types of income into schedules. If an item comes within a schedule it counts as income and income tax must be paid on it. The way the tax must be paid will depend on which schedule it falls into. The most common schedules are Schedule E for employees and Schedule D for the self-employed.

There are five main steps in calculating income tax:-

Step 1: Add together all your yearly income, including social security benefits, income from renting out accommodation, wages, occupational pension, interest from bank and building society accounts.

Step 2: Take off any income which is exempt from tax. Calculate whether you can claim tax relief on any of the money you have spent over the year (tax relief usually applies to people who are self-employed and have to buy items for the business). Deduct this tax relief. This leaves income on which tax may be payable (taxable income).

Step 3: Work out which tax allowances you are entitled to. You will be entitled to a personal allowance (plus age related additions if appropriate). These allowances are deducted at this stage in the calculation.

Step 4: Multiply the taxable income by the correct tax rate. This gives the tax due to be paid that year, unless you are entitled to married couple’s allowance for over 65 year olds.

Step 5: If applicable, deduct the appropriate percentage rate of married couple’s allowance for over 65 year olds.

Some income is exempt from income tax, which means that tax is never paid on this income. This income should therefore be put to one side before any tax calculation can be done. Examples of income which is exempt from tax include premium bond prizes, housing benefit, child benefit and profit-related pay. It is therefore necessary to check whether any income is exempt from tax before doing a tax calculation. For more income tax help, all the help you need in on the internet. The IRS itself can give you income tax help and answer any tax questions you may have.

Tags: Additions, Income Tax Help, Income Tax Law, Internet Today, Married Couple, Occupational Pension, Personal Allowance, Retirement Pension, Social Security, Social Security Benefits, Step 1, Step 3, Tax Allowances, Tax Rate, Tax Relief, Tax Time, Taxable Income, Time Income, Wages, Yearly Income

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Are Taxes Going Up? Will You Be In A Lower Or Higher Tax Bracket In Retirement?

For the past decade I have talked with clients every day about a system to distribute wealth for retirement tax-free. This system outlines exactly how to apply the Internal Revenue Code rules to your individual situation and find tax savings for you, which, in many cases, other advisors dont know exist. Look at it this way. While saving for retirement in an IRA account or 401(k) plan may have provided you with tax savings when you made those contributions, there comes a day when the IRS wants you to pay the tax bill. When that time comes, you dont want to be subject to tax-rate risk. Tax-rate risk is the ability that congress has to change the amount of taxes you pay on those distributions. We hear people on TV always promoting a 401(k) or IRA. They say something like, You are in a higher tax bracket now and you will be in a lower tax bracket in retirement. This just may not be the case, as we will talk about today. For some reason, these same so-called financial experts dont seem to know where taxes have been, what is happening in congress, or what really determines ones tax bracket in retirement.

So the topic of this months newsletter is to address the question of could taxes go up in the future and could you be in a higher tax bracket in retirement?

Lets start with what the highest marginal tax bracket has been? According to the IRS, in the mid 40s the highest marginal tax bracket was an astounding 94%. As recently as the 70s it was as high as 70%. Currently we are at historic lows. So the question is, what could cause taxes to go up?

Well you probably guessed it, the need for more revenue. Government expenses were 300 billion more then their revenues according to the 2006 reports from 2005. The number one cost to the government is Social Security and Medicare, taking up 37% of the federal expenditures. National Defense, Veterans, and Foreign Affairs come in second at 24.5%. Of course, other things like wars, hurricanes, and terrorism dont help either. Guess what they report as the number one income source for the government? Yup you guessed it, individual income tax, making up 38% of their revenue. Coming in second is social insurance tax, making up 32%. This is where it gets scary. David Walker and Ben Bernanki both agree 100% on this topic. David Walker is the person who audits the government’s books and serves as the investigative arm of the U.S. Congress. He is also the governments chief accountant. He said in his testimony before the budget committee of the U.S. Senate, this year:

Because this baby boomer generation is retiring and drawing on social security, Medicare, and Medicaid, that the government will either have to cut federal spending by 60% or raise federal taxes to 2 times todays level.

In the 2003 Tax Act they have already set in motion for all of the tax brackets to go up starting in 2011. What that means is you will be paying higher taxes.

We already know where taxes have been in the past, which tells us where they could go in the future. So when these so-called financial experts say you will be in a lower tax bracket, they must not be looking at the fact that tax rates are going up. The only other area they could be looking at would be your income in retirement. Your income is what determines what tax bracket you are in. So, for arguments sake, lets say taxes stay the same. You still may be in a higher tax bracket in retirement, even if you have less income. The reason why is that most people lose tax deduction in retirement. The biggest deductions, such as your mortgage interest, children, and retirement contributions are no longer there to deduct. This can cause your taxes to go up.

If your income in retirement is lower than it is now, and you saved money for say 20, 30, 40 years, what kind of job did you do saving for retirement? Or think about it this way, how many people want to retire to a significantly reduced standard of living? When you retire dont you want to retire to at least the same standard of living you are used to? Some even want a better standard of living. They dont want to sit around the house. They want to travel or go see grandchildren. Is all that stuff free? In addition you may have other expenses such as health insurance, or medical expenses. So, you see, you lose some expenses like mortgage payments but other expenses take their place. Some may say Hey, I have great health coverage through my employer. Its part of my retirement plan. If that is you, you should go talk to some GM and FORD employees and see what is happening to their health coverage. Its being changed on them whether they like it or not. Dont plan on things that are not guaranteed.

It gets worse. Did you know that with 401(k)s, IRAs, and other qualified plans, the IRS will tell you how much money you have to take out at age 70 ? They call this minimum distribution requirements. If you dont take out the amount they told you to, they will penalize you 50%. If you withdraw too much money in retirement, your social security will get taxed. Yes, the IRS wants to tax your social security, as noted earlier. This is a big part of their revenue. Dont worry though, you dont have to pay tax on your social security if youve done everything right.

Fortunately, there are congressionally approved methods for receiving retirement income tax-free. This is known as asset shifting or distribution planning. This is where I spend most of my time. It is not just how you invest that is important but where you invest. When we get together I will show you some creative ideas to take what you are currently doing and show you how you can either reduce the taxes you will pay in retirement or show you how you could possibly get your entire retirement tax-free, including your social security. In summary, this means you will take advantage of todays low taxes, eliminate what is called tax-rate risk, eliminate the minimum distribution problem, and receive your social security 100% tax-free.

If you or someone you know needs some help managing retirement assets, setting up a retirment savings plan, or have life insurance needs, just give me a call at 801-545-0696.

Respectfully,
Mark K. Lund, CRFA
Wealth Manager
Stonecreek Wealth Advisors, Inc.
10421 So. Jordan Gateway, Suite 600
So. Jordan, UT 84095
801-545-0696
http://www.stonecreekwealthadvisors.com
Securities offered through Sammons Securities Company, LLC
Member NASD and SIPC

Tags: Decade, Distributions, Federal Expenditures, Financial Experts, Foreign Affairs, Government Expenses, Higher Tax Bracket, Internal Revenue Code, Ira Account, Irs, Lows, Marginal Tax Bracket, Medicare, Mid 40s, Rate Risk, Retirement Tax, Saving For Retirement, Social Security, Social Security And Medicare, Tax Rate

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