Joan and Sam have been married for several years. Joan is expecting in 6 months. Together they decided they ought to seek out professional investment advice. They currently have $56,500 in Sams 401(k) plan and have paid off all of their credit card debts and have one student loan at 6.70%, with a balance of $4,500 and a monthly payment of $179.00. They currently rent a condo and would like to find a home for their (soon to be) new family. Ages 29 and 27 respectively. Sam works for a national info technology company and participates in his company 401(k) plan up to the company 3% match. Sam and Joan are covered by Sams company health insurance plan with $50 office visits, $25 Rx, $100 hospital visits and total family out of pocket $4,000 per year. Joan has a home-based business and last year sales exceeded $100,000 and her net income was $41,500. Sams W2 reported $107,500 gross wages and $3,225 401(k) contribution. Sam and Joan describe themselves and college educated, middle class, long-term investors. Use 2020 tax rates.
Current monthly cash flow
Income:
| Sam | Net pay check | $5,950.00 |
| Joan | Average | $3,000.00 |
Expenses:
| Rent | $1,400 |
| Utilities | $350 |
| Phone/Cable/Internet | $200 |
| Phone/Entertainment | $1,000 |
| Clothing/Other | $250 |
| Car Loan (2) | $750 |
| Student Loan | $179.00 |
| Auto Insurance | $250 |
Their Checking account balance = $36,785.00
Car (1) 2013 Ford F150 fair market value $18,500 current loan balance $8,250 $450.00 (7.5%)
Car (2) 2012 Toyota Rav4 fair market value $11,500 current loan balance $5,200 $300.00 (6%)
Assignment: Please provide a detailed financial plan recommendation with schedules if necessary, for Sam and Joan. Additionally, what is their marginal tax bracket and their average tax rate. Can you provide tax savings and if so, what would their pro forma marginal tax bracket and average tax be? Provide budgets, forecasts, net worth statements, and asset allocations as you see fit.
Tax Reference Guide:
REFERENCE GUIDE 35% Standard Deduction Married, joint $24,400 Single, Married, separate $12,200 Head of household $18,350 Blind or over 65: add $1,300 if married; add $1,650 if single or head of household Child/Dependent Tax Credit Child $2,000 per child up to $1,400 refundable Qualifying Dependent (Family credit) $500 per dependent, non-refundable Mortgage Interest Deduction On acquisition indebtedness up to $750,000 for 1st and 2nd homes (combined) No deduction for home equity indebtedness State and Local Tax Deduction Limit State and local income and property tax deduction $10,000 Tax Brackets for 2019 Taxable income (i.e., income minus deductions and exemptions) between: Married, Joint Marginal Tax Rates $0-$19,400 10% $19,401-$78,950 12% $78,951-$168,400 22% $168,401-$321,450 24% $321,451-$408,200 32% $408,201-$612,350 over $612,350 37% Single $0-$9,700 10% $9,701-$39,475 12% $39,476-$84,200 22% $84,201-$160,725 24% $160,726-$204,100 $204,101-$510,300 35% over $510,300 37% Married, Separate $0-$9,700 10% $9,701-$39,475 12% $39,476-$84,200 22% $84,201-$160,725 24% $160,726-$204,100 32% $204,101-$306,175 35% over $306,175 37% Head of Household $0-$13,850 10% $13,851-$52,850 12% $52,851-$84,200 22% $84,201-$160,700 24% $160,701-$204,100 $204,101-$510,300 35% over $510,300 37% Estates and Trusts $0-$2,600 10% $2,601-$9,300 24% $9,301-$12,750 35% over $12,750 Corporate Tax Rate 21% Retirement Tax Credit A percentage tax credit for an IRA, 401(k), 403(b) or 457' plan contribution, in addition to deduction or exclusion, if Married, joint Below $64,000 AGI Head of Household Below $48,000 AGI Single; Married, separate Below $32,000 AGI Maximum Qualified Longevity Annuity Contract (QLAC) premium $130,000 Gift and Estate Tax Gift tax annual exclusion $15,000 Estate and gift tax rate 40% Estate tax exemption $11,400,000 Lifetime gift exemption $11,400,000 GST exemption $11,400,000 Annual exclusion for gifts to noncitizen spouse $155,000 Additional Medicare Tax Where Income Exceeds $200,000 ($250,000 married, joint) Additional tax on excess of earned income 0.9% Additional tax on Net Investment Income 3.8% 32% Alternative Minimum Tax Exemption Amounts Married, joint $111,700 Single, HOH $71,700 Married, separate $55,850 IRA contribution Under age 50 $6,000 Age 50 and over $7,000 Phaseout for deducting IRA contribution Married, joint $ 103,000-$123,000 MAGI Single, HOH $64,000-$74,000 MAGI Married, separate $0-$10,000 MAGI Phaseout for deducting spousal IRA? $193,000-$203,000 MAGI Phaseout of Roth contribution eligibility Married, joint $ 193,000-$203,000 MAGI Single, HOH $122,000-$137,000 MAGI Married, separate $0-$10,000 MAGI SEP contribution Tin to 250% of compensation limit 5600 Health Care Eligible Long-Term Care Deduction Limit Age 40 or less $420 Age 41 to 50 $790 Age 51 to 60 $1,580 Age 61 to 70 $4,220 Ages over 70 $5,270 Per Diem Limitation for LTC Benefits $370 Education 32% Coverdell Education Savings Account $2,000 Coverdell contribution eligibility phaseout Married, joint $190,000-$220,000 All others $95,000-$110,000 Student loan interest deduction limit $2,500 Interest deduction phaseout Married, joint $140,000-$170,000 MAGI 37% Jiliyic, TION 122,UUU JIUUU IVIRUI 35% 37% 21% 0% 15% 20% $9,301-$12,750 over $12,750 Corporate Tax Rate Long-Term Capital Gains and Qualified Dividend Tax Rates Married, Joint $0-$78,750 $78,751-$488,850 over $488,850 Single $0-$39,375 $39,376-$434,550 over $434,550 Married, Separate $0-$39,375 $39,376-$244,425 over $244,425 Head of Household $0-$52,750 $52,751-$461,700 over $461,700 Estates and Trusts $0-$2,650 $2,651-$12,950 over $12,950 Married, separate $0-$10,000 MAGI SEP contribution Up to 25% of compensation, limit $56,000 Minimum compensation to participate in SEP $600 SIMPLE elective deferral Under age 50 $13,000 Age 50 and over $16,000 401(k), 403(b), 4574 and SARSEP elective deferral under age 50 $19,000 401(k), 403(b), 4574 and SARSEP elective deferral age 50 and over $25,000 Annual defined contribution limit $56,000 Annual defined benefit limit $225,000 Highly compensated employee $125,000 Key Employee in top-heavy plan $180,000 Annual compensation taken into account for qualified plans $280,000 0% 15% 20% Student loan interest deduction limit $2,500 Interest deduction phaseout Married, joint $140,000-$170,000 MAGI All others $70,000-$85,000 MAGI Phaseout of Lifetime Learning Credits Married, joint $116,000-$136,000 All others $58,000-$68,000 Tax-free savings bonds interest phaseout Married, joint $121,600-$151,600 MAGI All others $81,100-$96,100 MAGI 1. Head of Household. 2. Assumes individual or spouse also participates in an employer- sponsored retirement plan. 3. Special increased limit may apply to certain 403(b) contributors with 15 or more years of service. 4. In last 3 years prior to year of retirement, 457 plan participant may be able to double elective deferral if needed to catch-up on prior missed contributions, but if they do, they cannot use catch-up. 5. Total Employee Medicare Tax is 1.45% +0.9% = 2.35%. 6. Including Interest, dividends, capital gains, and annuity distributions. 0% 15% 20% 0% 15% 20% 0% 15% 20% Touchstone Investments DISTINCTIVELY ACTIVE 800.638.8194 . Touchstonelnvestments.com 2019 TAX REFERENCE GUIDE Uniform Lifetime Table Social Security? Maximum wage base $132,900 Amount needed to earn one credit $1,360 Amount needed to earn four credits $5,440 Social Security Tax Rates + Medicare Withholding Employee 7.65% Employer 7.65% Self-Employed 15.30% Use to calculate Required Minimum Distributions from IRAs and qualified plans during owner's life. Do not use this table if owner has spousal beneficiary more than 10 years younger. Instead use Joint Life Table from IRS Pub. 590. Single Life Table Use to calculate Minimum Required Distributions from IRAs and qualified plans after owner's death. See IRS Pub. 590 for complete table of ages o through 111+. Age Multiple Age Multiple Taxpayer's Life Taxpayer's Life 39 44.6 / 64 21.8 Maximum monthly retirement , ---- - - - Age Multiple Age Multiple Taxpayer's Age Life Expectancy Taxpayer's Age Life Expectancy 39 44.6 43.6 42.7 70 93 9.6 9.1 41.7 95 8.6 8.1 7.6 97 7.1 99 6.7 21.8 21.0 20.2 19.4 18.6 17.8 17.0 16.3 15.5 14.8 14.1 13.4 12.7 12.1 100 6.3 27.4 26.5 25.6 24.7 23.8 22.9 22.0 21.2 20.3 19.5 18.7 17.9 17.1 16.3 15.5 14.8 14.1 13.4 12.7 40.7 39.8 38.8 37.9 37.0 36.0 35.1 34.2 33.3 32.3 31.4 30.5 101 102 Employer 7.65% Self-Employed 15.30% Maximum monthly retirement Benefit at full retirement age* $2,861 Cost of Living Adjustment 2.8% Maximum earnings (during work years) subject to tax $132,900 Income (in retirement) causing Social Security benefits to be taxable Married, joint 50% taxable $32,000-$44,000 MAGI 85% taxable Over $44,000 MAGI Single 50% taxable $25,000-$34,000 MAGI 85% taxable Over $34,000 MAGI Loss of Social Security retirement benefits: In years prior to full retirement age, $1 in benefits will be lost for every $2 of earnings in excess of $17,640. In the year of full retirement age, $1 in benefits will be lost for every $3 of earnings in excess of $46,920 (applies only to months of earnings prior to full retirement age). There is no limit on earnings beginning the month an individual attains full retirement age. Average monthly benefit (December 2017) Average monthly retirement benefit Men $1,565 Women $1,244 Average monthly survivor benefit Men $1,179 Women $1,344 Source: Fast Facts and Figures about Social Security, 2018. 5.5 5.2 103 104 4.9 105 4.5 11.4 106 107 4.2 3.9 3.7 29.6 10.8 10.2 9.7 108 109 28.7 27.9 3.4 27.0 8.6 26.1 25.2 12.0 110 111 112 113 114 115+ 3.1 2.9 2.6 2.4 2.1 1.9 84 85 86 87 8.1 7.6 7.1 24.4 11.4 10.8 10.2 6.7 23.5 22.7 92 6.3 IRA Beneficiary Options Spouse's single life expectancy, attained age method Spouse (Sole) 7. Source: Social Security Administration, www.ssa.gov 12/12/2018. 8. Income is most income including muni bond interest but only 1/2 of Social Security. Treat as own (not available if trust is the named beneficiary) Designated Beneficiary with a Life Expectancy (Including Qualified Trust) Five-year rule (if death occurs before RBD*) *In 2019, for those turning age 62, full retirement age is 66 years and six months. Information contained herein is current as of 12/12/18, subject to legislative changes and is not intended to be legal or tax advice. Consult a qualified tax advisor regarding specific circumstances. The investment products discussed are not bank products and are neither the obligations of, nor are they quaranteed by, the financial institution where they are offered. They are not insured Nonspouse (or spouse if NOT sole) Beneficiary's single life expectancy, reduction method REFERENCE GUIDE 35% Standard Deduction Married, joint $24,400 Single, Married, separate $12,200 Head of household $18,350 Blind or over 65: add $1,300 if married; add $1,650 if single or head of household Child/Dependent Tax Credit Child $2,000 per child up to $1,400 refundable Qualifying Dependent (Family credit) $500 per dependent, non-refundable Mortgage Interest Deduction On acquisition indebtedness up to $750,000 for 1st and 2nd homes (combined) No deduction for home equity indebtedness State and Local Tax Deduction Limit State and local income and property tax deduction $10,000 Tax Brackets for 2019 Taxable income (i.e., income minus deductions and exemptions) between: Married, Joint Marginal Tax Rates $0-$19,400 10% $19,401-$78,950 12% $78,951-$168,400 22% $168,401-$321,450 24% $321,451-$408,200 32% $408,201-$612,350 over $612,350 37% Single $0-$9,700 10% $9,701-$39,475 12% $39,476-$84,200 22% $84,201-$160,725 24% $160,726-$204,100 $204,101-$510,300 35% over $510,300 37% Married, Separate $0-$9,700 10% $9,701-$39,475 12% $39,476-$84,200 22% $84,201-$160,725 24% $160,726-$204,100 32% $204,101-$306,175 35% over $306,175 37% Head of Household $0-$13,850 10% $13,851-$52,850 12% $52,851-$84,200 22% $84,201-$160,700 24% $160,701-$204,100 $204,101-$510,300 35% over $510,300 37% Estates and Trusts $0-$2,600 10% $2,601-$9,300 24% $9,301-$12,750 35% over $12,750 Corporate Tax Rate 21% Retirement Tax Credit A percentage tax credit for an IRA, 401(k), 403(b) or 457' plan contribution, in addition to deduction or exclusion, if Married, joint Below $64,000 AGI Head of Household Below $48,000 AGI Single; Married, separate Below $32,000 AGI Maximum Qualified Longevity Annuity Contract (QLAC) premium $130,000 Gift and Estate Tax Gift tax annual exclusion $15,000 Estate and gift tax rate 40% Estate tax exemption $11,400,000 Lifetime gift exemption $11,400,000 GST exemption $11,400,000 Annual exclusion for gifts to noncitizen spouse $155,000 Additional Medicare Tax Where Income Exceeds $200,000 ($250,000 married, joint) Additional tax on excess of earned income 0.9% Additional tax on Net Investment Income 3.8% 32% Alternative Minimum Tax Exemption Amounts Married, joint $111,700 Single, HOH $71,700 Married, separate $55,850 IRA contribution Under age 50 $6,000 Age 50 and over $7,000 Phaseout for deducting IRA contribution Married, joint $ 103,000-$123,000 MAGI Single, HOH $64,000-$74,000 MAGI Married, separate $0-$10,000 MAGI Phaseout for deducting spousal IRA? $193,000-$203,000 MAGI Phaseout of Roth contribution eligibility Married, joint $ 193,000-$203,000 MAGI Single, HOH $122,000-$137,000 MAGI Married, separate $0-$10,000 MAGI SEP contribution Tin to 250% of compensation limit 5600 Health Care Eligible Long-Term Care Deduction Limit Age 40 or less $420 Age 41 to 50 $790 Age 51 to 60 $1,580 Age 61 to 70 $4,220 Ages over 70 $5,270 Per Diem Limitation for LTC Benefits $370 Education 32% Coverdell Education Savings Account $2,000 Coverdell contribution eligibility phaseout Married, joint $190,000-$220,000 All others $95,000-$110,000 Student loan interest deduction limit $2,500 Interest deduction phaseout Married, joint $140,000-$170,000 MAGI 37% Jiliyic, TION 122,UUU JIUUU IVIRUI 35% 37% 21% 0% 15% 20% $9,301-$12,750 over $12,750 Corporate Tax Rate Long-Term Capital Gains and Qualified Dividend Tax Rates Married, Joint $0-$78,750 $78,751-$488,850 over $488,850 Single $0-$39,375 $39,376-$434,550 over $434,550 Married, Separate $0-$39,375 $39,376-$244,425 over $244,425 Head of Household $0-$52,750 $52,751-$461,700 over $461,700 Estates and Trusts $0-$2,650 $2,651-$12,950 over $12,950 Married, separate $0-$10,000 MAGI SEP contribution Up to 25% of compensation, limit $56,000 Minimum compensation to participate in SEP $600 SIMPLE elective deferral Under age 50 $13,000 Age 50 and over $16,000 401(k), 403(b), 4574 and SARSEP elective deferral under age 50 $19,000 401(k), 403(b), 4574 and SARSEP elective deferral age 50 and over $25,000 Annual defined contribution limit $56,000 Annual defined benefit limit $225,000 Highly compensated employee $125,000 Key Employee in top-heavy plan $180,000 Annual compensation taken into account for qualified plans $280,000 0% 15% 20% Student loan interest deduction limit $2,500 Interest deduction phaseout Married, joint $140,000-$170,000 MAGI All others $70,000-$85,000 MAGI Phaseout of Lifetime Learning Credits Married, joint $116,000-$136,000 All others $58,000-$68,000 Tax-free savings bonds interest phaseout Married, joint $121,600-$151,600 MAGI All others $81,100-$96,100 MAGI 1. Head of Household. 2. Assumes individual or spouse also participates in an employer- sponsored retirement plan. 3. Special increased limit may apply to certain 403(b) contributors with 15 or more years of service. 4. In last 3 years prior to year of retirement, 457 plan participant may be able to double elective deferral if needed to catch-up on prior missed contributions, but if they do, they cannot use catch-up. 5. Total Employee Medicare Tax is 1.45% +0.9% = 2.35%. 6. Including Interest, dividends, capital gains, and annuity distributions. 0% 15% 20% 0% 15% 20% 0% 15% 20% Touchstone Investments DISTINCTIVELY ACTIVE 800.638.8194 . Touchstonelnvestments.com 2019 TAX REFERENCE GUIDE Uniform Lifetime Table Social Security? Maximum wage base $132,900 Amount needed to earn one credit $1,360 Amount needed to earn four credits $5,440 Social Security Tax Rates + Medicare Withholding Employee 7.65% Employer 7.65% Self-Employed 15.30% Use to calculate Required Minimum Distributions from IRAs and qualified plans during owner's life. Do not use this table if owner has spousal beneficiary more than 10 years younger. Instead use Joint Life Table from IRS Pub. 590. Single Life Table Use to calculate Minimum Required Distributions from IRAs and qualified plans after owner's death. See IRS Pub. 590 for complete table of ages o through 111+. Age Multiple Age Multiple Taxpayer's Life Taxpayer's Life 39 44.6 / 64 21.8 Maximum monthly retirement , ---- - - - Age Multiple Age Multiple Taxpayer's Age Life Expectancy Taxpayer's Age Life Expectancy 39 44.6 43.6 42.7 70 93 9.6 9.1 41.7 95 8.6 8.1 7.6 97 7.1 99 6.7 21.8 21.0 20.2 19.4 18.6 17.8 17.0 16.3 15.5 14.8 14.1 13.4 12.7 12.1 100 6.3 27.4 26.5 25.6 24.7 23.8 22.9 22.0 21.2 20.3 19.5 18.7 17.9 17.1 16.3 15.5 14.8 14.1 13.4 12.7 40.7 39.8 38.8 37.9 37.0 36.0 35.1 34.2 33.3 32.3 31.4 30.5 101 102 Employer 7.65% Self-Employed 15.30% Maximum monthly retirement Benefit at full retirement age* $2,861 Cost of Living Adjustment 2.8% Maximum earnings (during work years) subject to tax $132,900 Income (in retirement) causing Social Security benefits to be taxable Married, joint 50% taxable $32,000-$44,000 MAGI 85% taxable Over $44,000 MAGI Single 50% taxable $25,000-$34,000 MAGI 85% taxable Over $34,000 MAGI Loss of Social Security retirement benefits: In years prior to full retirement age, $1 in benefits will be lost for every $2 of earnings in excess of $17,640. In the year of full retirement age, $1 in benefits will be lost for every $3 of earnings in excess of $46,920 (applies only to months of earnings prior to full retirement age). There is no limit on earnings beginning the month an individual attains full retirement age. Average monthly benefit (December 2017) Average monthly retirement benefit Men $1,565 Women $1,244 Average monthly survivor benefit Men $1,179 Women $1,344 Source: Fast Facts and Figures about Social Security, 2018. 5.5 5.2 103 104 4.9 105 4.5 11.4 106 107 4.2 3.9 3.7 29.6 10.8 10.2 9.7 108 109 28.7 27.9 3.4 27.0 8.6 26.1 25.2 12.0 110 111 112 113 114 115+ 3.1 2.9 2.6 2.4 2.1 1.9 84 85 86 87 8.1 7.6 7.1 24.4 11.4 10.8 10.2 6.7 23.5 22.7 92 6.3 IRA Beneficiary Options Spouse's single life expectancy, attained age method Spouse (Sole) 7. Source: Social Security Administration, www.ssa.gov 12/12/2018. 8. Income is most income including muni bond interest but only 1/2 of Social Security. Treat as own (not available if trust is the named beneficiary) Designated Beneficiary with a Life Expectancy (Including Qualified Trust) Five-year rule (if death occurs before RBD*) *In 2019, for those turning age 62, full retirement age is 66 years and six months. Information contained herein is current as of 12/12/18, subject to legislative changes and is not intended to be legal or tax advice. Consult a qualified tax advisor regarding specific circumstances. The investment products discussed are not bank products and are neither the obligations of, nor are they quaranteed by, the financial institution where they are offered. They are not insured Nonspouse (or spouse if NOT sole) Beneficiary's single life expectancy, reduction method
