Financial Advisor Tim Hayes

Taxes Case Study

This presentation is a hypothetical view of financial planning items a client might see in the course of an advisory review. This is for informational purposes only and should not be construed as an investment recommendation or solicitation. Please consult a financial professional to discuss your individual situation prior to making any investment decision. Cambridge does not offer tax or legal advice.
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This is a hypothetical example and not actual clients and their outcomes

Sean is 26 years old and just started working in an entry-level management position for Nissan. He makes $64,000 a year with Nissan, plus he is self-employed as a wedding photographer, grossing $12,000.

He has yet to accumulate any assets, and he has $38,000 of student loan debt accruing interest at 4% per year. He is currently paying it down at a rate of $600 a month. At that rate, the loan should be paid off in six years (it is unknown if that is the required amount due or if Sean is accelerating his payments).

Sean wants to know the following:

[1] his taxable income, tax liability, and ways to reduce his taxable income,

[2] the tax pros and cons of his dad having a business,

[3] if his mom (Mrs. Konnery) can ‘create’ any tax deductions or credits, and

[4] his parents’ tax liability plus ways they can reduce taxes, with or without catering.

My Professional Designations

Financial advisors who hold the AIF® designation have:

  • Completed the AIF® Designation Training;
  • Passed the AIF® designation exam;
  • Met the designation’s prerequisites and qualification and conduct standards;
  • Accrued a minimum of six hours of continuing professional education, with at least four hours coming from fi360-produced sources;
  • Attested to a code of ethics.

Financial professionals who hold the CRPS® designation have:

  • Completed a course of study encompassing design, installation, maintenance and administration of retirement plans;
  • Passed an end-of-course examination that tests their ability to synthesize complex concepts and to apply theoretical principles to life situations;
  • Pledged adherence to the CRPS® Standards of Professional Conduct, and are subject to a disciplinary process in that regard.

CRPS® designees renew their designation every two years by completing 16 hours of continuing education, reaffirming adherence to the Standards of Professional Conduct, and complying with self-disclosure requirements.

Financial Advisor who hold the AWMA® designation have:

  • Completed a course of study encompassing wealth strategies, equity-based compensation plans, tax-reduction alternatives, and asset-protection alternatives;
  • Passed an end-of-course examination that tests their ability to synthesize complex concepts and apply theoretical concepts to real-life situations;
  • Agreed to adhere to the AWMA® Standards of Professional Conduct, and are subject to a disciplinary process in that regard.

AWMA® designees renew their designation every two years by completing 16 hours of continuing education, reaffirming adherence to the Standards of Professional Conduct, and complying with self-disclosure requirements.

CFS designation is awarded upon passing an examination on mutual funds, ETFs, REIT's, closed-end funds, and similar investments.

Advanced studies on topics include:

  • Fund analysis and selection;
  • Asset Allocation;
  • Portfolio Construction
  • Sophisticated investment strategies for risk management, taxes, and estate planning.

 

 

San Diego, CA, November 13, 2020 – The Institute of Business & Finance (IBF) recently awarded Tim Hayes with the only nationally recognized tax designation, CTS (Certified Tax Specialist). This graduate-level designation is conferred upon candidates who complete an 135+ hour educational program focusing on personal income taxes and methods to reduce tax liability. The combined top state and federal bracket can easily exceed 40%.

San Diego, CA, September 1, 2020 – The Institute of Business & Finance (IBF) recently awarded Tim Hayes with the estate planning designation, CES™ (Certified Estate and Trust Specialist™).

This graduate-level designation is conferred upon candidates who complete a 135+ hour educational program focusing on trusts, wills, probate, retirement benefits, caring for children, and what should be done after the death of a loved one. Over $50 trillion is expected to pass from one generation to another during the next half-century.

The Accredited Portfolio Management AdvisorSM, or APMA® program, is a designation program for financial professionals. The program educates advisors on the finer points of portfolio creation, augmentation, and maintenance. Students will gain hands-on practice in analyzing investment policy statements, building portfolios, and making asset allocation decisions.

San Diego, CA, May 12, 2020 – The Institute of Business & Finance (IBF) recently awarded Timothy Hayes with the only nationally recognized annuity designation, CAS® (Certified Annuity Specialist®).

This graduate-level designation is conferred upon candidates who complete a 135+ hour educational program focusing on fixed-rate and variable annuities. Several trillion dollars are invested in annuities; it is estimated that at least one-third of all annuity contracts are not titled correctly.

Taxes

Sean has $71,000 in taxable income, a marginal income tax rate of 22%, and an average income tax rate of 12%–14%. He also pays 6.2% into social security at his job at Nissan and 1.45% in Medicare taxes. On his $7,000 of net earnings from self-employment, he is responsible for employer and employee portions (12.4% in social security and 2.9% in Medicare taxes).

Sean could lower his income taxes by contributing to his company retirement plan. However, there is no employer match. Because of his income, he is ineligible for a deductible IRA. Therefore, if he wants tax savings, he needs to use the employer plan.

Another option is to forgo deductibility and set up a Roth IRA. Forty to forty-five years of tax-free growth might be a better choice than a deductible retirement contribution with no employer match.

He can withdraw his contributions to a Roth at any time with no penalty. Plus, he can withdraw $10,000 penalty-free, including gains for his first-time home. For 2020, the maximum he can contribute to a Roth is $6,000.

Sean should also have three to six months of his monthly expenses saved before prioritizing saving for retirement or accelerating paying down his student loan.

The student loan interest rate is only 4%, and Sean can deduct it, even if he uses the standard deduction, so the real interest is a little over 3%. A diversified portfolio of mostly stocks at his age will hopefully grow faster than 3%, making the argument for prioritizing saving over paying down the loan balance.

Taxes Case Study
Taxes Case Study

Dad Starting a Business

Mr. Konnery is a great chef, having worked at the Ritz Carlton. So, starting up a small catering business is in his wheelhouse.

Taxes should never be why someone starts a business, but there are some tax benefits to Konnery opening one. One reason is that it allows Mr. Konnery to put pre-tax money aside in a retirement plan to make up for the loss of the $1,500 pension if Mr. Konnery predeceases Ms. Konnery.

He can write off most business expenses, even if they don’t itemize. A home office deduction might be a little tricky because most of the catering work, I assume, will be done in the kitchen, a room that is used for more than the business. If Mr. Konnery decides to open a business, it behooves him to speak with an accountant experienced with small home businesses.

Assuming they file a joint tax return, a downside regarding taxes is that the Konnerys could make more of their social security taxable. (If, for some reason, they are filing separately while married, then all their social security is already taxable.)

The pension, interest from the municipal bonds, and half of their social security put them around $44,000. Any number above that increases the taxable percentage of social security from 50% to 85%.

Tax Deductions for Mom

Ms. Konnery volunteers twice a week for the Girl Scouts of America. She drives forty miles each way to get there. She can deduct her transportation cost as a charitable contribution, but only if she itemizes her deductions.

Parents’ Current Tax Liability

Half their social security ($6,100) is currently taxable. If you combine that with $18,000 pension income, you get $24,100, below the 2020 standard deduction of $24,800. The Konnerys are unlikely to need to file a federal income tax return. That will change if they open a small catering business.

Read More: The Impact of Tax Cuts on Your State Income Taxes and Financial Planning

You need to check with your state to figure out if you need to file there.

The Konnerys should think about paying off their home equity loan, possibly using the municipal bonds income. The interest rate on the loan is higher than the bond yield. They are likely using the higher standard deduction and do not write off the home equity interest.

To avoid probate, they should also consider putting the house and bonds into a revocable trust. There is no need to worry about federal estate taxes as their assets are well below the amount needed to trigger that tax. (Your state may have a lower triggering rate)

This presentation is a hypothetical view of financial planning items a client might see in the course of an advisory review. This is for informational purposes only and should not be construed as an investment recommendation or solicitation. Please consult a financial professional to discuss your individual situation prior to making any investment decision

Securities Licenses

Passing the exam qualifies candidates as both securities agent and investment advisor representative.

Individuals who pass the Series 7 examination are eligible to trade all securities products: corporate securities, municipal fund securities, options, direct participation programs, investment company products, variable annuities contracts, etc.

The exam measures the degree to which each candidate possesses the knowledge needed to offer the products of investment and insurance companies, including the sales of mutual funds and variable annuities.

The exam qualifies candidates as securities agent within a state. Nearly all states require people to pass the Series 63 for state registration.

I am also licensed to offer life, health, accident, disability and long-term care insurance products, as well as fixed annuities.

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