What Do Your Taxes Pay For?

Taxes are one of the biggest budget items for most taxpayers, yet many have no idea what they’re getting for their money.
In 2012, as in recent years, Americans spent more on taxes than on groceries, clothing, and shelter combined. In fact, we worked until mid-April just to earn enough money to pay our taxes. So what do all those weeks of work get us?
The accompanying chart breaks down the $3.7 trillion federal budget for 2012 into major categories. By far, the biggest category is Social Security and income programs, which consume one-third of the budget. This includes Social Security, retirement and disability programs for federal employees, food assistance, and unemployment compensation. Another 21% of the budget goes to defense and related items, and 23% goes to Medicare and health programs.
Are taxes one of your biggest budget items? Take steps to make sure you’re managing your overall tax bill. Please consult a tax professional for specific information regarding your individual situation.

Pieces of the Federal Pie

Roughly 67% of the 2012 Federal budget was used for Social Security, Medicare, defense, and related programs.

Source: Congressional Budget Office, 2013

Itemized Federal Spending

Here’s a breakdown of how the Federal budget was spent, according to categories established by the Congressional Budget Office.

Source: Center on Budget and Policy Priorities, 2012

Resource: http://www.authenticcounsel.com/resource-center/tax/what-do-your-taxes-pay-for

What Is a 1035 Exchange?

According to the most recent information available, Americans had individual life insurance with a total face value of $10.9 trillion.¹
Due to a variety of factors, these individuals may find themselves in circumstances where the specific life insurance policy or annuity contract they own does not suit their needs.² They may want to exchange products without incurring a taxable event.
That’s where Section 1035 of the Internal Revenue Code comes in. A 1035 exchange provides a means for exchanging an annuity contract or life insurance policy without being treated as if it had been surrendered or sold. Keep in mind that a 1035 exchange can be used only when it involves the same contract or policy holder and the same type of product.

Trading-In an Older Policy

A 1035 exchange, provided certain requirements are met, gives policy or contract holders the flexibility to “trade-in” an older contract or policy for a newer contract or policy. A newer policy or contract may have lower costs, a higher death benefit, or more investment choices.
1035 exchanges involve a complex set of tax rules and regulations. Before moving forward with a 1035 exchange, consider working with a tax professional who is familiar with the rules and regulations.

Partial Exchanges

Also, individuals can do a partial 1035 exchange for a portion of the total contract. A tax professional should be consulted for a partial exchange because any gain may be subject to ordinary income tax when withdrawn.
Several factors will affect the cost and availability of life insurance, including age, health and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policy holder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.
Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies). The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities are not guaranteed by the FDIC or any other government agency. The earnings component of an annuity withdrawal is taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Annuities have fees and charges associated with the contract, and a surrender charge also may apply if the contract owner elects to give up the annuity before certain time-period conditions are satisfied.
Variable annuities are sold by prospectus, which contains detailed information about investment objectives and risks, as well as charges and expenses. You are encouraged to read the prospectus carefully before you invest or send money to buy a variable annuity contract. The prospectus is available from the insurance company or from your financial professional. Variable annuity subaccounts will fluctuate in value based on market conditions, and may be worth more or less than the original amount invested if the annuity is surrendered.

Permitted Exchanges

While a life insurance policy may be exchanged for another life insurance policy, a modified endowment contract, an annuity contract, or a long-term care policy, the reverse is not true. This chart details the exchanges permitted under a 1035 exchange.

 Source: Internal Revenue Service, 2013

 Resource: http://www.authenticcounsel.com/resource-center/tax/what-is-a-1035-exchange

 

Spotting Credit Trouble

Almost half of American households carry a balance on their credit cards, and the average debt totals $15,263.¹
The wise use of credit is a critical skill in today’s world. Used unwisely, credit can rapidly turn from a useful tool to a crippling burden. There are a number of warning signs that you may be approaching credit problems:

1. Have you used one credit card to pay off another?
2. Have you used credit card advances to pay bills?
3. Do you regularly use a charge card because you are short on cash?
4. Do you charge items you might not buy if you were paying cash?
5. Do you need to use your credit cards to buy groceries?
6. Are you reluctant to open monthly statements from creditors?
7. Do you regularly charge more each month than you pay off?
8. Do you write checks today on funds to be deposited tomorrow?
9. Do you apply for new credit cards so you can increase borrowing?
10. Are you receiving late and over limit credit card charges?

It is important to recognize the warning signs of potential credit problems. The quicker corrective action is taken the better. Procrastinating is almost a sure way to guarantee that you may face financial difficulty down the road.


Resource: http://www.authenticcounsel.com/resource-center/money/spotting-credit-trouble

Keep Your Umbrella Handy

In 2013, the U.S. had a record 9.0 million millionaires, down from a peak of 9.2 million in 2007. An increase in personal wealth may bring greater financial flexibility; it may also bring greater liability. Individuals with high net worth, or those who are perceived to have high net worth, may be more likely to be sued. And personal injury claims can reach into the millions.¹
Umbrella liability insurance is designed to put an extra layer of protection between your assets and a potential lawsuit. It provides coverage over and above existing automobile and homeowner’s insurance limits.
For example, imagine your teenage son borrows your car and gets in an accident, seriously injuring the other driver. The accident results in a lawsuit and a $1 million judgment against you. If your car insurance policy has a liability limit of $500,000, that much should be covered. If you have additional umbrella liability coverage, your policy can be designed to kick in and cover the rest. Without umbrella coverage, you may be responsible for paying the other $500,000 out of pocket, which could mean liquidating assets, losing the equity in your home, or even having your wages garnished.
Umbrella liability insurance is usually sold in increments of $1 million and generally costs just a few hundred dollars a year. It typically covers a broad range of scenarios including bodily injuries, property damage caused by you or a member of your household, even libel, slander, false arrest, and defamation of character.
Deciding whether liability coverage is right for you may be a question of lifestyle. You might consider buying a policy if you:

• Entertain frequently and serve your guests alcohol
• Operate a business out of your home
• Give interviews that may be published
• Employ uninsured workers on your property
• Drive a lot of miles or have teenage drivers
• Live in a manner that gives the appearance of wealth
• Have a dog, especially if the breed is known to be aggressive
• Own jet skis, a boat, motorcycles, or snowmobiles

Even if you don’t yet have a tent in the millionaire camp, you may want to consider the benefits of liability insurance. You don’t have to be a millionaire to be sued for a million dollars. Anyone who is carefully building a financial portfolio may want to limit their exposure to risk. Umbrella liability can be a fairly inexpensive way to help shelter current assets and future income from the unexpected.
This is a simplified description of coverage. All statements made are subject to the provisions, exclusions, conditions and limitations of applicable insurance policies. Please refer to actual policy documents for complete details regarding coverage.

He Earned, She Earned

In North America, 63% of millionaires are men while 37% of millionaires are women.

Chart Source: The Wall Street Journal, June 22, 2011; most recent information available.

Resource: http://www.authenticcounsel.com/resource-center/insurance/keep-your-umbrella-handy 

 

Disability And Your Finances

The Social Security Disability Insurance program paid out $130 billion in benefits to 10.6 million individuals in 2011. And with a rush of new applicants lining up each year, the system is expected to exhaust its reserves by 2017 if changes aren’t made.
Rather than depending on a government program to protect their income in the event of a disability, many individuals prefer to protect themselves with personal disability insurance.²
Disability insurance provides protection by replacing a portion of your income, usually between 50% and 70%, if you become disabled as the result of an injury or illness. This type of safeguard may have considerable benefits since a disability can be a two-fold financial problem. Those who become disabled often find they are unable to work and are also saddled with unexpected medical expenses.

What About Workers Comp?

Many people think of workers compensation as a disability safety net. But workers compensation pays benefits only to individuals who become disabled while at work. If your disability is the result of a car accident or other off-the-job activity, you may not qualify for worker compensation.
Even with workers compensation, each state makes its own rules about payment and benefits, so coverage may vary considerably. It might make sense to find out what your state offers and plan to supplement coverage on your own, if necessary, especially if you have a high-risk profession. Likewise, if you have an active lifestyle that puts you at a higher risk of disability, considering an extra layer of protection may be an option.
If you become disabled, personal disability insurance can be structured to pay a benefit weekly or monthly. And benefits are not taxable, if you have paid the premiums in full.²
When you purchase a policy, you may be able to tailor coverage to suit your needs. For example, you might be able to adjust benefits or elimination periods. You might opt for comprehensive protection or decide to define coverage more specifically. Some policies also offer partial disability coverage, cost-of-living adjustments, residual benefits, survivor benefits, and pension supplements. Since coverage is designed to replace income, most people choose to purchase protection only during their working years.
Even as changes are made to federal disability programs, they typically provide only modest supplemental income, and qualifying can be difficult. If you doṉt want to rely solely on Uncle Sam in the event of an unforeseen accident or illness, disability insurance may be a good way to protect your income and savings.

Out of Commission

According to the most recent data available, 62% of disabled Americans are completely unable to work, while 38% can work in a limited capacity.

Chart Source: ACLI Life Insurers Fact Book 2011, 2011

Resource: http://www.authenticcounsel.com/resource-center/insurance/disability-and-your-finances

Universal Life Insurance

Universal life insurance is permanent life insurance — that is, it remains in force for your whole life. But universal life insurance has an important difference from other types of permanent insurance: it provides a flexible premium.
That means the policyholder decides how much to put in above a set minimum. By extension, the policyholder also determines the face amount of the policy.
Universal life insurance policies accumulate cash value — cash value that grows tax deferred. Guarantees are based on the claims-paying ability of the issuing company.
Universal life insurance policies normally let policyholders borrow a portion of their policy’s cash value under fairly favorable terms. And interest payments on policy loans go directly back into the policy’s cash value.*
When the policyholder dies, his or her beneficiaries receive the benefit from the policy. Depending on how the policy is structured, benefits may or may not be taxable.
*Universal life insurance has certain features that make the policy suitable for some individuals. Whether universal life insurance is appropriate for you will depend on your goals, needs, and circumstances.
Accessing the cash value in your insurance policy through borrowing — or partial surrenders — has the potential to reduce the policy’s cash value and benefit. Accessing the cash value may also increase the chance that the policy will lapse and may result in a tax liability if the policy terminates before your death.
Universal life insurance can be structured so that the cash value that accumulates will eventually cover the premiums. However, additional out-of-pocket payments may be required if the policy’s dividend decreases or if investment returns underperform.
Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.
Withdrawals of earnings are fully taxable at ordinary income tax rates. If you are under age 59½ when you make the withdrawal, you may be subject to surrender charges and assessed a 10% federal income tax penalty. Also, withdrawals will reduce the benefits and value of the contract. Life insurance is not FDIC insured. It is not insured by any federal government agency or bank or savings association.
Generally, loans taken from a policy will be free of current income taxes provided certain conditions are met, such as the policy does not lapse or mature. Keep in mind that loans and withdrawals reduce the policy’s cash value and death benefit. Loans also increase the possibility that the policy may lapse. If the policy lapses, matures, or is surrendered, the loan balance will be considered a distribution and will be taxable.


Resource: http://www.authenticcounsel.com/resource-center/insurance/universal-life-insurance

Your Emergency Fund: How Much Is Enough?

Have you ever had one of those months? The water heater stops heating, the dishwasher stops washing and your family ends up on a first-name basis with the nurse at urgent care. Then, as you’re driving to work, giving yourself your best, “You can make it!” pep talk, you see smoke seeping out from under your hood.
Bad things happen to the best of us, and instead of conveniently spacing themselves out, they almost always come in waves. The important thing is to have a financial life preserver, in the form of an emergency cash fund, at the ready.
Although many people agree that an emergency fund is an important resource, they’re not sure how much to save or where to keep the money. Others wonder how they can find any extra cash to sock away. One survey found that 28% of Americans don’t have any emergency savings at all.¹

How Much Money?

When starting an emergency fund, you’ll want to set a target amount. But how much is enough? Unfortunately, there is no “one-size-fits-all” answer. The ideal amount for your emergency fund may depend on your financial situation and lifestyle. For example, if you own your homeor provide for a number of dependents, you may be more likely to face financial emergencies. And if the crisis you face is a job loss or injury that affects your income, you may need to depend on your emergency fund for an extended period of time.

Coming Up with Cash

If saving several months of income seems an unreasonable goal, don’t despair. Start with a more modest target, such as saving $1,000. Build your savings at regular intervals, a bit at a time. It may help to treat the transaction like a bill you pay each month. Consider setting up an automatic monthly transfer to make self-discipline a matter of course. You may want to consider paying off any credit card debt before you begin saving

Once you see your savings begin to build, you may be tempted to use the account for something other than an emergency. Try to budget and prepare separately for bigger expenses you know are coming. Keep your emergency money separate from your checking account so that it’s harder to dip into.

Where Do I Put It?

An emergency fund should be easily accessible, which is why many people choose traditional bank savings accounts. Savings accounts typically offer modest rates of return. Certificates of Deposit may provide slightly higher returns than savings accounts, but your money will be locked away until the CD matures, which could be several months to several years.
The Federal Deposit Insurance Corporate insures bank accounts and certificates of deposit (CD) up to $250,000 per depositor, per institution in principal and interest. CDs are time deposits offered by banks, thrift institutions, and credit unions. CDs offer a slightly higher return than a traditional bank savings account, but they also may require a higher amount of deposit. If you sell before the CD reaches maturity, you may be subject to penalties.
Some individuals turn to money market accounts for their emergency savings. Money market funds are considered low-risk securities, but they’re not backed by any government institution so it is possible to lose money. Depending on your particular goals and the amount you have saved, some combination of lower-risk investments may be your best choice.
Money held in money market funds is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Money market funds seek to preserve the value of your investment at $1.00 a share. However, it is possible to lose money by investing in a money market fund. Money market mutual funds are sold by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.
The only thing you can know about unexpected expenses is that they’re coming — for everyone. But having an emergency fund may help alleviate the stress and worry associated with a financial crisis. If your emergency savings are not where they should be, consider taking steps today to create a cushion for the future.

Where Do You Fit In?

Here’s a look at how Americans are doing when it comes to emergency savings:

Bankrate.com, June 25, 2012

Resource: http://www.authenticcounsel.com/resource-center/money/your-emergency-fund-how-much-is-enough

 

U.S. Personal Savings Rate

The U.S. personal saving rate stood at 4.9% at the end of 2013, a bit higher than its 10-year average of 3.9% and well below the recent five-year high of 8.7% in December 2012.¹
The personal saving rate is the federal government’s estimate of what percent of their incomes U.S. households are saving. But market watchers and economists are mixed on what can be learned from swings in the saving rate.

Why Economists Struggle

They struggle with the personal saving rate because it’s a derivative number — that is, it’s not measured directly. Instead, the Bureau of Economic Analysis derives the saving rate from other estimates. Here’s how it’s calculated:²

1. The Bureau of Economic Analysis subtracts payroll and income taxes from personal income to get disposable personal income.
2. The Bureau then subtracts its estimate of personal outlays — expenditures, interest payments, and payments — from disposable personal income to get an estimate of personal saving.
3. The Bureau concludes by dividing personal income — the number the Bureau started with — by personal saving.

As currently structured, the U.S. Personal Saving Rate does not include capital gains from the sale of land or financial assets in its estimate of personal income. This effectively excludes capital gains — an important source of income for some.
Another consideration is that the index includes contributions to qualified retirement accounts, such as IRAs and 401(k) plans, as a personal outlay. It does not consider IRAs or 401(k) plans personal savings

Gaining Insight

Gaining a bit of insight into a popular economic indicator can help you better understand trends as they are discussed in newspapers and websites. However, don’t let your long-term savings program be influenced by a national number.

Economic Indicator?

The saving rate trends higher when the economy is contracting and trends lower when the economy recovers.

Sources: Federal Reserve, 2013; for the period October, 2004 through September, 2013.

Resource: http://www.authenticcounsel.com/resource-center/money/u-s-personal-savings-rate

The Cost of Procrastination

Some of us share a common experience. You’re driving along when a police cruiser pulls up behind you with its lights flashing. You pull over, the officer gets out, and your heart drops.
“Are you aware the registration on your car has expired?”
You’ve experienced one of the costs of procrastination. Procrastination can cause missed deadlines, missed opportunities, and just plain missing out.
Procrastination is avoiding a task that needs to be done—postponing until tomorrow what could be done today. Procrastinators can sabotage themselves. They often put obstacles in their own path. They may choose paths that hurt their performance.
Though Mark Twain famously quipped, “Never put off until tomorrow what you can do the day after tomorrow.” We know that procrastination can be detrimental, both in our personal and professional lives. Problems with procrastination in the business world have led to a sizable industry in books, articles, workshops, videos, and other products created to deal with the issue. There are a number of theories about why people procrastinate, but whatever the psychology behind it, procrastination potentially may cost money—particularly when investments and financial decisions are put off.
As the illustration on the back page shows, putting off investing may put off potential returns.
If you have been meaning to get around to addressing some part of your financial future, maybe it’s time to develop a strategy. Don’t let procrastination keep you from pursuing your financial goals

Early Bird

Let’s look at the case of Cindy and Charlie, who each invest $100,000.
Charlie immediately begins depositing $10,000 a year in an account that earns 6% rate of return. Then, after 10 years, he stops making deposits.
Cindy waits 10 years before getting started. She then starts to invest $10,000 a year for 10 years into an account that also earns a 6% rate of return.
Cindy and Charlie have both invested the same $100,000. However, Charlie’s balance is higher at the end of 20 years because his account has more time for the investment returns to compound.



Resource: http://www.authenticcounsel.com/resource-center/retirement/the-cost-of-procrastination