Financial independence (getting to point x) a comprehensive tax smart wealth management guide, 2nd edition

Table of Contents Cover Foreword Preface: Living the American Dream Acknowledgments Introduction: Getting to Point X Financial Literacy and the Move Away from Capitalism Point X: Our Fundamental Financial Goal Ten Key Issues to Comprehensive Wealth Management Our Biggest Expense Take a Financial Planning Checkup The Power of This Book What's New in the Second Edition Chapter 1: Committing to Living Within Your Means The American Dream Becomes the American Nightmare Living Within Your Means: The Essential Step Simple Saving Note Chapter 2: Understanding Taxes A Brief History of the US Tax System Organizing and Retaining Your Records Tax Preparation Services Accumulating Wealth Through Tax Planning Notes Chapter 3: Determining Your Financial Position Figuring Your Financial Net Worth Case Study: How One Couple Learned They Were Spending More Than They Earned Making Sense of Cash Flow Establishing Your Financial Goals Finding Trusted Advisors Notes Chapter 4: Managing Debt Case Study: How Two Doctors Went Bankrupt in Only a Few Years – What Not to Do Basic Principles for Managing Debt Good Debt Versus Bad Debt Credit Card Debt Auto Loans Student Loans Home Mortgage Loans Business and Investment Loans Understanding Credit Your Credit Report and Your Credit Score Preventing Identity Theft The Equifax Breach Analyzing Your Debt Chapter 5: Insuring Your Health and Life Choosing a Health Insurance Plan Long Term Care Insurance Disability Insurance Life Insurance Buying Insurance Policies Note Chapter 6: Protecting Your Property with Insurance Case Study: How a Lack of Insurance Wiped Out One Woman's Life Savings Homeowners Insurance Automobile Insurance Umbrella Liability Insurance Buying Insurance Policies Chapter 7: Paying for College Is College the Best Choice for You and Your Child? The Cost of College and What You Can Expect to Pay Case Study: How Not Saving for Your Child's Education Can Ruin Your Finances – and Your Child's Conducting a “Needs Analysis” for Your Children's College Educations Strategies for Saving Money for College Education Education Tax Breaks and Credits Notes Chapter 8: Planning for Retirement Case Study: Saving Versus Not Saving for Retirement: The $1.7 Million Difference Retirement Equation: Calculating Your Personal Point X The High Cost of Waiting to Save for Retirement What You Can Expect to Receive from Social Security Qualified Retirement Plans The Difference Between Traditional IRAs and Roth IRAs Fixed and Variable Annuities Retirement Funding: “Needs Analysis” Notes Chapter 9: Managing Your Investments Analyzing Your Ability and Willingness to Take Risk Stocks, Bonds, Hybrid Securities, Mutual Funds, and Exchange Traded Funds Diversification, Asset Allocation, and Rebalancing Dollar Cost Averaging Inflation and Taxes: The Biggest Drains on Investment Return Medicare Surtax on Net Investment Income Cryptocurrency and Its Tax Treatment Notes Chapter 10: Preserving Your Estate The Federal Gift and Estate Tax System Legal Documents to Consider for Estate Planning The Probate and Administration Process and Why You May Want to Avoid It Using a Planned Gifting Strategy Ownership of Property and How It Is Transferred Reasons for Creating a Trust Benefit from a Family Limited Partnership Estate Tax Planning and Life Insurance Asset Protection and Long Term Care Chapter 11: Starting Your Own Business How Starting Your Own Business Can Lead to Financial Independence The Three Pillars of Establishing a Successful Business Sobering Statistics on Business Success Rates Business Plan Establishing and Operating a Successful Business Entity Choices Tax Identification Number Accounting Methods Reporting Business Income and Expenses What Is the Number One Expense in Operating a Business? Employee Versus Independent Contractor Business Tax Deduction Versus Business Tax Credit “Ordinary and Necessary” Test Deductible Business Expenses Nondeductible Business Expenses Home Office Deduction Travel Expense As a Business Deduction Deducting Automobile Expenses Depreciation Deductions Choosing the Right Retirement Plan for Your Business Recordkeeping Financial Statements Financial Management Team What the Tax Cuts and Jobs Act of 2017 Means for Your Small Business Chapter 12: The Time Value of Money Notes Appendix A: Selecting a Trusted Advisor The Difference Between Suitability and Fiduciary Standards Financial Planners Tax Advisors Investment Advisors Insurance Advisors Attorneys Appendix B: 101 Ways to Save $20 or More per Week Housing Transportation Family Risk Management Food Personal Care Entertainment Loan Payments Taxes Gifts and Donations Professional Fees and Legal Obligations Child Care and Other Expenses Pet Care and Other Expenses Personal Expenses Note Appendix C: Basic Concepts and Definitions of Various Types of Taxes Income Taxes: Concepts You Should Know Calculating Your Taxable Income and Liability Calculating and Filing Your Taxes Other Tax Considerations About the Author Note Index End User License Agreement List of Exhibits Chapter Exhibit 2.1 Highest Marginal US Income Tax Rate: 1913 to 2018 Chapter Exhibit 7.1 Projected Annual Four Year College Costs 2011–2035 (in 2017 constant dollars) Exhibit 7.3 Growth of Savings Invested in a Tax Free 529 Plan Versus a Taxable Savings Account Chapter Exhibit 8.2 The High Cost of Waiting to Save for Retirement Exhibit 8.3 Ratio of Social Security–Covered Workers to Beneficiaries over Time Chapter Exhibit 9.3 Annual Returns for Eight Major Asset Classes over the Past 12 Years, from Best to Worst Exhibit 9.4 Six Sample Asset Allocation Models (1 = Most risk adverse investor; = Most aggressive investor) Financial Independence (Getting to Point X) A COMPREHENSIVE TAX-SMART WEALTH MANAGEMENT GUIDE Second Edition John J Vento Copyright © 2018 by John J Vento All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750 8400, fax (978) 646 8600, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748 6011, fax (201) 748–6008, or online at www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation Y ou should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762 2974, outside the United States at (317) 572 3993, or fax (317) 572 4002 Wiley publishes in a variety of print and electronic formats and by print on demand Some material included with standard print versions of this book may not be included in e books or in print on demand If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com For more information about Wiley products, visit www.wiley.com Library of Congress Cataloging in Publication Data Names: Vento, John, author Title: Financial independence (getting to point X) : a comprehensive tax smart wealth management guide / John J Vento Description: Second Edition | Hoboken : Wiley, 2018 | Revised edition of the author's Financial independence (getting to point X), c2013 | Includes index | Identifiers: LCCN 2018021243 (print) | LCCN 2018021981 (ebook) | ISBN 9781119510383 (Adobe PDF) | ISBN 9781119510352 (ePub) | ISBN 9781119510345 (hardback) Subjects: LCSH: Finance, Personal—United States | BISAC: BUSINESS & ECONOMICS / Finance Classification: LCC HG179 (ebook) | LCC HG179 V457 2018 (print) | DDC 332.02400973—dc23 LC record available at https://lccn.loc.gov/2018021243 Cover Design: Wiley Cover Images: © Axel Bueckert/EyeEm/Getty Images; © SchulteProductions/Getty Images This book is dedicated to the memory of my parents, Rosario Vento and Concetta Giuffre Vento, for the sacrifices and commitments they made throughout their lives to provide their children with the opportunity to live the “TRUE” American Dream Momma and Poppa, I love you, miss you, and think about you every single day! Foreword Driving to work the other day, I saw a billboard with a simple statement: “We spend more time clicking ‘like’ than planning for retirement.” Take a moment or two to let that thought sink in If you're like me, you probably find that proposition pretty disturbing, primarily because it rings so true By now thousands, maybe even millions, of Americans have seen that billboard noting that we spend more time choosing emojis, or even looking at billboards, than planning for retirement I wonder how many of those people have actually started thinking about retirement This is a pressing issue for those in their forties or older, but it's important for young adults, too Cat videos and pictures of our friends' grandchildren are certainly more fun than dealing with financial matters It's a lot easier to assume things will work out than it is to come up with a financial plan But whether you have four years or 40 left in your working life, retirement gets closer every day If you ask most Americans what material thing they desire most, high on everybody's list is having enough money to whatever they want without worry Achieving financial independence, what John Vento calls “getting to point X,” is such a common aspiration, but short of hitting a lottery mega jackpot, most people have no idea how to get there As contradictory as it may sound, the United States is the richest and most successful country in history, yet we are a nation of financial illiterates The vast majority of people graduate from high school or college with no understanding of fundamental financial concepts like how to make a budget, why it's important to start saving and investing at an early age to take advantage of the way the power of compounding makes your money grow faster, or how the wrong kind of debt can cripple their chances of achieving their financial goals Consider that currently only 17 states have some mandated financial literacy curriculum for students in high school I saw an article recently that pointed out that 94% of American adults were unable to pass an 11 question test that asked basic financial questions like, “If you purchase a bond and interest rates rise, what will happen to the price of the bond?” In today's environment, knowing the answer to that question could be pretty helpful Economically, we live in a different world than our parents did For most people who don't work in government, pensions are a thing of the past; public pensions are threatened as well We often hear about how New Deal and Great Society programs like Social Security and Medicare may soon be unable to fund their long term obligations We've made individuals responsible for funding their own retirements and financial futures, but haven't given them the resources and tools to so Unfortunately, money doesn't come with a set of instructions, an issue of which John Vento, as both a Certified Financial Planner™ and Certified Public Accountant, is well money, availability (calculation), 247 needs analysis answers, 240e analysis questions, 218e planning action plan, 247–248 Tax Alpha to the 2nd Power facts/strategies, 243–247 projection, qualified retirement plans, 225–229 saving, 73 case study, 213–217 cost, 219–222, 221e discipline, 214 savings plans incentives, continuation, 35 standard of living, maintenance, 241 success/failure, issues, 214 Retirement plan, distributions, rolling, 246 funding, 327 selection, 352–360, 377 types, difference, 247 Revenue Act of 1861, 25 Revenue bonds, 259 Review engagement, 365 Revocable trust, 298, 299–300 Risk company specific/industry specific risk, 255 default risk, 255 economic risk, 255 impacts, understanding, 282 inflation risk, 254 interest rate risk, 254–255 investment risk, understanding, 254–255 market rate risk, 255 presence, 93 taking, ability/willingness (analysis), 250–255 tolerance, 263, 269, 282 evaluation, 254 level, 265 profile/score assessment, questions, 253e Roth 401(k) plans, 228 Roth individual retirement accounts (Roth IRAs), 198–199, 234–235 benefits, comparison, 243 contributions, modified AGI (effect), 232e conversion, income limitation, 244 deadline, 244 establishment, 371 IRAs, difference, 229–235 required minimum distribution (RMD), 243 Rule of 72, 220, 380–382 calculations, 381e Russell 2000, 263 Salary deferrals, 228 Sales information, 28 strategies, 322 taxes, 420 SARSEPs, grandfathering, 354 Saving, discipline, 214 ease/problem, 20 simple saving, 18–21 special situations, 19–20 steps, 405 Savings growth, 191e usage, 312 Savings bonds advantages/disadvantages, 197–198, 208 interest, exemption, 197 requirements, tax free treatment, 196 usage, 196–198 Savings Incentive Match Plans for Employees (SIMPLE), 70, 229, 354–356 401(k) plans, 354–356 contributions, 355 plan, 242, 327 deferral limit catch up contribution, 244 setup/operation, 355 pretax salary deferral, 246–247 Schedule C, 326, 345 cost allocation, 78 Schedule E, cost allocation, 78 Schedule F, 345 Schedule K 1, usage, 328 S Corporation, 326, 331–332, 337 Second home, mortgage interest deduction, 114 Second to die insurance policy, 310–311 Second to die life insurance policy, 151–152 Section 179 deduction, 372 Section 199 deduction, 369 Section 529 educational savings programs, 189 Section 529 plans, 189–192 control/tax advantages, 191–192 Section 529 qualified tuition plans, 187 Self insurance (self insuring), 5, 146, 165 Self payment, priority, 14–15, 73 Settler, 297 Settlor, 286 Shelter, size consideration, 16 Short term capital gains, 280 Short term capital loss deduction, 115 Simple saving, 18–21 Simple trust, 301 Simplified employee pension (SEP), 229, 353–354 plans, 327, 353–354 Single taxpayers, filing tax status, 424 Sixteenth Amendment, income taxes (relationship), 25–26 Slander, coverage, 169 Small Business Health Insurance Program (SHOP), 130 Small Business Job Protection Act, passage, 189 Small business tax credits, 133 healthcare, provision, 130–131 Small cap funds (small market capitalization funds), 264, 268 Smith, Chad, 299 Social Security Administration (SSA) benefits, 139–140, 242 collection, 246 early withdrawal penalty, exceptions, 234 payment, 23 ratio, 223e receiving, expectation, 222–225 taxes, 375, 418 subtraction, 241 Trustees Report, 223–224 Trust Fund, 224 working time calculation, 144 Social Security disability benefits, 143–144 Sole proprietorship, 326–327 Specialized business skills, 320 Special purchases, funding, 75 Spending/earnings, case study, 38–49 Split interest trusts, 303–305 establishment, advantage, 303–304 Spousal portability, 311–313, 317 Springing power of attorney, 288–289 Standard deduction, 427–428 doubling, 34, 77 Standard of living defining, maintenance, 241 Standard & Poor's (rating agency), 171, 257 Standard & Poor's 500(S&P 500), 263 State and local tax (SALT) itemized deduction, 79 State income taxes, 416, 427 emergence, 26–27 State inheritance tax, 313 Statement of cash flow analysis, 67–68 example, 50e–64e needs analysis, 240–241 Statement of changes in equity, 364 Statement of financial position, 37, 43 analysis, 46–48 example, 39e–42e State of New York Mortgage Agency (SONYMA), 99 States, direct taxation, 25 State Unemployment Tax Act (SUTA), 7, 338 Stepped up basis, 295, 296–297 Stockbroker, 402 Stock market selling/purchase, timing, 251–252 Stock market, ups/downs (worry), 248 Stocks, 255, 256 dividends/splits, taxation (absence), 280 Student income/assets, factoring, 201 Student loans, 97–98 debt forgiveness, 116 deductibility, 115–116 presence, 116 Subchapter S corporation, 332, 371, 422 Suitability, fiduciary standards (difference), 396–397 Sum certain future value (FV) factor, 382, 383e–384e present value (PV) factor, 385, 388e–389e Supplemental Security Income (SSI), 140 Survivorship life policy, 151 Syrus, Publius, 83 Tariffs, imposition, 421 Taxable distributions, penalty, 245 Taxable income/liability, calculation, 425–428 Taxable savings account, tax free 529 plan (contrast), 191e TaxAct, 29 Tax Alpha to the 2nd Power business initiation, 368–376 debt management facts/strategies, 114–116 education payment facts/strategies, 208–209 estate preservation facts/strategies, 316–317 facts/strategies, 82 financial position, facts/strategies determination, 75–81 investment management, 279–281 property protection facts/strategies, 171–172 retirement planning facts/strategies, 243–247 wealth accumulation facts/strategies, 35–36 Tax Cuts and Jobs Act of 2017, 33–35, 77, 133, 152, 423 components, 34–35 impact, 367 kiddie tax simplification, 193 mortgage interest, tax deductibility, 114–115 Taxes administration, collection/distribution, 422 advantages, 192 advisor, 30, 398–400 consultation, 36 attorneys, 404 expertise, 30–31 audited returns, 434 avoidance, tax evasion (contrast), 31 benefits, 33 calculation, 428–433 considerations, 433–434 control, 36 cost savings, 412 credits, 79–80, 369–370, 428, 432–433 deductibility, 114–115 deductions itemization, 78 maximization, 35 tax credits, difference, 432–433 deferral, 226 dollar for dollar reduction, 204 effects, estimation, 433 evasion, 31 exemptions, 76 extensions, 434 filing, 428–433 status, 205, 424, 430e–431e forms, 433 gift tax exclusions, exception, 293–294 identification number, 333 inflation, relationship, 276–277 kiddie tax, change, 81 pay as you go process, 424–425 payment, deferral, 35 planning defining, 31–32 education, 32 software, 29 usage, 31–35 preparation fees, itemized deduction (cessation), 78 services, 28–31 software, 29 preparer, hiring, 29–30, 36 progressive tax rates, 424 rates, 429 U.S tax rate schedule, 430e–431e return amendment, 434 self completion, 36 schedules, 433 state/local income taxes, emergence, 26–27 system, modernization, 367 taxable plans, 188e tax alpha strategy, tax deductible business expenses, 342–343 tax deductible expense items, 27 tax deferred growth, 236 tax deferred plans/tax exempt plans, 188e tax exempt bond funds (muni bond funds), 264 tax exempt income, 426 tax free 529 plan, taxable savings account (contrast), 191e tax free savings accounts, 134 tax saving strategies, 71 types, concepts/definitions, 415 understanding, 5, 23 action plan, 36 U.S tax system, history, 24–27 Tax free income, increase, 78 Tax qualified long term care insurance contracts, 139 Tax Relief Act (2010), 301, 311 Tenancy joint tenancy, 295–296 tenancy by the entirety, 296 tenancy in common, 295 Term life insurance, 148–149 permanent life insurance, comparison, 150–152 Testamentary trust, 292, 297, 299 Theft losses, attribution, 172 Third party administrator (TPA), assistance, 360 Third party reporting, requirement (absence), 278 Third party system, usage, 166 Time horizon, 250, 269 Time value of money, 92, 379 Total cash outflow, 241 Total disability, 143 Total tax liability, 424 Tracing principle, 115 Traditional individual retirement accounts (traditional IRAs), 230–234 benefits, comparison, 243 contribution, modified AGI (effect), 231e conversion, income limitation, 244 deadline, 244 Transactional, term (usage), 396 Transfer on death (TOD) accounts, 286 Transportation, costs, 66 saving, 408–409 TransUnion, 106–107 Travel expense benefit, maximization, 369 business deduction, 347–348 Treasury bills/notes/bonds, 258 Treasury Inflation Protected Securities (TIPS), 258 Triple tax free treatment, 258 True income, 425–426 Trust A B trusts, 300–301 bypass trust, 300 change, 298 charitable lead trusts, 307 charitable remainder trusts, 308 charitable trusts, 305–307 complex trust, 302 creation, 286–287, 298 reasons, 297–308 credit shelter trust, 300 grantor trust, 301 income, tax brackets, 302 inter vivos trust, 297 living trust (inter vivos trust), 298–299 presence, impact, 292–293 revocable/irrevocable trust, 298, 299–300 simple trust, 301 taxation, process, 301–302 testamentary trust, 297, 299 usage, 307–308 usefulness, diminishment, 301 Trusted advisors location, 75 questions, 395–396 selection, 395 Trustee, 286, 297 Trustor (settler/grantor), 297 TurboTax, 29 Umbrella extended coverage, 169 Umbrella liability insurance, 157, 167–170 policy, consideration, 173 Underwriting, 141 Unemployment taxes, 418 Unexpected situations, funding, 74–75 Uniform Gifts/Transfers to Minors Act (UGMA/UTMA), 189, 192–194 Unimproved investment/non income producing land, section 266 election, 79 Uninsured motorist coverage, 164–165 UnitedHealthcare, 122 United States v Coinbase, Inc., 279 Universal life insurance, 150 U.S Constitution, formation, 26–27 U.S Department of Education, National Center for Education Statistics study, 199 U.S equities, 264, 268 User fees, 421 U.S income tax rate (1913–2018), 26e U.S savings bonds, 189, 195–198 U.S Tax Code, 24 U.S tax rate schedule, 430e–431e U.S tax system, history, 24–27 U.S Treasury securities, 257–258 Variable annuities, 235, 237–238 Variable life insurance, 150 Vehicular license (license plate) fees, 421 Vento, Doreen, 100 Ventura, Carol, 247 Veteran benefits, 426 Veteran's Aid and Attendance benefit, 315 Victims of Communism Memorial Foundation, Voluntary, term (usage), 33 W form, update, 35 Waiting period, 141 Want/need, difference (knowledge), 16–17, 88 Washington, George, 119 Wealth consideration, 71–72 defining, 71–72 Wealth accumulation, 276–277 facts/strategies, 35–36 tax planning, usage, 31–35 Wealth management issues, 5–6 questionnaire, 8–9 What if scenarios, 148, 219 Whole life insurance, 149–150 policy, 93–94 Whole life policy, 149 Will absence, impact, 318 living will, establishment, 287–288 preparation, 286 Withholding taxes, 425 Workers' compensation insurance, 129 payments, 153 YouGov study, Zuckerberg, Mark, 176 WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley’s ebook EULA ... you are taking advantage of every tax deduction and tax credit available to you? If you answered no, read Chapter 2, “Understanding Taxes,” and pay particular attention to the Tax Alpha to the 2nd. .. to the 2nd Power facts and strategies that will help you accelerate your wealth accumulation and dramatically increase your chances of reaching point X, financial independence Take a Financial. .. and dreams on a new life in America Because he could not afford to pay for two tickets, my dad initially came to America alone After a year, he was able to afford to rent a small but comfortable