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May Newsletter

May Newsletter

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Published by Janet Barr

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Published by: Janet Barr on May 01, 2012
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Collaborative FinancialSolutions, LLC
CA Insurance License #0B33145Janet Barr, MS, ChFC, CLULPL Registered Principal206 E. Victoria StSanta Barbara, CA 93101805-965-0101
May 2012
Hidden Taxes: What Is Your True Cost?Why Women Need Social SecurityPay Down Debt or Save and Invest?What is personal liability insurance anddo I have it?
Hidden Taxes: What Is Your True Cost?
See disclaimer on final page
We are pretty well awareof the taxes we must payas U.S. citizens; incometaxes, payroll taxes, salestaxes, property taxes, andgift and estate taxes, toname a few. We can easilysee these taxes on our paystubs, tax bills, and salesreceipts. But there are other taxes imposed onus that you may not be aware of. They are"hidden taxes." And when you add themtogether with visible taxes, you may besurprised about how high your taxes really are.Here's the rundown on hidden taxes.
How taxes are hidden
Taxes are hidden in many ways. For example,you see the payroll taxes that are deductedfrom your payroll check each pay period. Whatyou do not see are the taxes that your employerpays. For example, in addition to income tax,your employer pays half of the Social Securitytax as well as unemployment tax on yourwages. Like all costs paid by your employer,these taxes get passed on to you as anemployee (as a factor in compensation paid),as well as to shareholders and to clients andcustomers. And if you're receiving dividendsfrom a corporation, keep in mind that taxeshave already been paid on that income.But most hidden taxes are paid by consumers.Sometimes these taxes are disguised as fees,surcharges, tariffs, duties, assessments, dues,excises, levies, licenses, and tolls, amongothers. And sometimes they're simply rolled intothe price of goods and services and are eithercompletely undisclosed or they appearsomewhere in the fine print, which is often leftunread by the consumer.
Planes, trains, and automobiles
Many hidden taxes are associated with travel.For example, when you pull up to the pump,you can clearly see the price for the gas, butthe "taxes included" disclosure is usually postedsomewhere else. How much of what you paygoes to tax revenue? Well, it varies by eachstate and its tax policy at the time, but it canrange from 8¢ per gallon (Alaska) to 47.7¢ pergallon (California). (Source: Tax Foundation,Tax Data, February 25, 2011)Taxes associated with traveling by air caninclude ticket excise tax, flight segment tax,arrival and departure fees, September 11security fees, passenger facility fees, and--ifyour travel is international--agriculturalinspection, customs, and immigration user fees.There are 16 or more fees that can add up to$61 (or 20% of your total cost) or more.(Source: Airlines for America, www.airlines.org,2012) And those are just the U.S. taxes; therecan be foreign taxes as well.Car rental, hotel, and meal taxes can also addup. The GBTA Foundation, the education andresearch foundation of the Global BusinessTravel Association (GBTA), reported from its2011 annual study of the top 50 U.S. traveldestination cities that the travel taxes and feesimposed on travel-related services increasedthe traveler's cost an average of 56% over andabove any general sales taxes paid, and thattaxes for a single night at the national averageroom rate of $95.61 were $13.12. Thecombined lodging taxes levied by state, county,and city averaged 13.73%. (Source: NewsRelease, July 21, 2011, www.gbta.org).
Sin taxes
A seemingly favorite way for government to taxis with the so-called "sin" taxes. Ostensibly,these taxes are imposed to reduce behaviorthat society considers unhealthy, immoral, or just undesirable in some way. That is why thereis a tax on soda, alcohol, tobacco, gambling,and ammunition and firearms. According to theAlcohol and Tobacco Tax and Trade Bureau,revenue collected in 2011 for just some of theabove-referenced items totaled approximately$26 billion. (Source: Statistical Release,December 1, 2011, www.TTB.gov)
Why are taxes hidden?
Not surprisingly, hidden taxes largely gounnoticed. The result may be that this canmake it difficult for us to choose wisely thegoods and services that we purchase, or tohave a true accounting of our total tax burdens.
Page 1 of 4
Why Women Need Social Security
Did you know that the first person ever toreceive ongoing Social Security benefits was awoman? Ever since Ida May Fuller received thefirst retirement benefit check in 1940, womenhave been counting on Social Security toprovide much-needed retirement income.Social Security provides other importantbenefits too, including disability and survivor'sbenefits, that can help women of all ages andtheir family members.
Retirement benefits: a steady stream oflifetime income
While Social Security retirement benefits areimportant for everyone, they are especiallyimportant for women. Because womengenerally live longer and tend to have lowerlifetime earnings than men, they may be moredependent on Social Security benefits inretirement.*Fortunately, you can count on two features ofSocial Security to help you provide for a longretirement. First, benefits last as long as youlive; although you may exhaust other sources ofretirement income, it's impossible to outliveyour Social Security retirement income.Second, Social Security benefits are subject toautomatic cost-of-living adjustments thatincrease benefits when prices increase, anespecially valuable feature when you have torely on a fixed income for many years.When you work and pay Social Security taxes,you earn credits that enable you to qualify forSocial Security benefits. You can earn up to 4credits per year, depending on the amount ofincome that you earn, and you'll generally need40 credits (10 years of work) to be insured forretirement benefits. Your monthly retirementbenefit will be based on your lifetime earnings.However, if you don't work outside the home orhaven't worked long enough to qualify for SocialSecurity based on your own record (or havemuch lower earnings than your spouse), youmay still be eligible based on your spouse'srecord.
Disability benefits: help when you're illor injured
During your working years, you may suffer aserious illness or injury that prevents you fromearning a living, potentially putting yourself andyour family at financial risk. But if you're insuredunder Social Security, you may be able to getdisability benefits if you have worked longenough in recent years, your disability isexpected to last at least a year or result indeath, and you meet other requirements.More women than ever are now insured forSocial Security disability benefits. According tothe Social Security Administration (SSA), in1970, only 41% of women were insured; today,approximately 74% of women are insured.** Ingeneral, to be insured for disability benefits, youmust have earned at least 20 work creditsduring the last 40 calendar quarters (10 years).If you qualify for benefits, certain familymembers (such as your dependent children)may also be able to collect benefits based onyour work record.Because eligibility requirements are strict,Social Security is not a substitute for othertypes of disability insurance, but it can providebasic income protection for working women andtheir family members.
Survivor's benefits: financial protectionfor your family
You probably know the value of having lifeinsurance to protect your family, but did youknow that Social Security offers valuableincome protection as well? If you are insuredunder Social Security at your death, yoursurviving spouse (or ex-spouse), your children,or dependent parents may be eligible forbenefits based on your earnings record.You also have survivor protection if you'remarried and your insured spouse dies. If you'recaring for a child who is younger than age 16 ordisabled and who is entitled to benefits, youmay be entitled to widow's benefits. You mayalso be entitled to benefits if you are age 60 orolder (age 50 or older if you're disabled).
Three tips
Use the benefit calculators available on theSocial Security website to estimate yourfuture retirement, disability, and survivor'sbenefits. Social Security was never intendedto cover all of your financial needs, butunderstanding what benefits you might beentitled to can help you plan for the future.Consider the impact on your Social Securitybenefits if you plan on taking time out of theworkforce. Having years of no or low earningsmay mean lower benefits, and can also affectyour eligibility for disability coverage.Check your earnings history regularly, andreport any name changes right away to theSSA so that your earnings are recordedproperly. If your name doesn't match SSArecords, any income tax refund can also bedelayed.
*Fact Sheet: Social Security Is Important to Women, SSA Press Office; **Fast Facts & Figures About Social Security, 2011,SSA
If you have any questions about the Social Security program or the benefits you may be entitled to, visit www.socialsecurity.gov, or call (800) 772-1213.
Page 2 of 4, see disclaimer on final page
Pay Down Debt or Save and Invest?
There are certainly a variety of strategies forpaying off debt, many of which can reduce howlong it will take to pay off the debt and the totalinterest paid. But should you pay off the debt?Or should you save and invest? To find out,compare what rate of return you can earn onyour investments versus the interest rate on thedebt. There may be other factors that youshould consider as well.
Rate of return on investments versusinterest rate on debt
Probably the most common factor used todecide whether to pay off debt or to makeinvestments is to consider whether you couldearn a higher after-tax rate of return on theinvestments than the after-tax interest rate onthe debt if you were to invest your moneyinstead of using it to pay off the debt.For example, say you have a credit card with a$10,000 balance on which you paynondeductible interest of 18%. You wouldgenerally need to earn an after-tax rate ofreturn greater than 18% to consider making aninvestment rather than paying off the debt. So,if you have $10,000 available to invest or payoff debt and the outlook for earning an after-taxrate of return greater than 18% isn't good, itmay be better to pay off the debt than to makean investment.On the other hand, say you have a mortgagewith a $10,000 balance on which you paydeductible interest of 6%. If your income taxrate is 28%, your after-tax cost for the mortgageis only 4.32% (6% x (1 - 28%)). You wouldgenerally need to earn an after-tax rate ofreturn greater than 4.32% to consider makingan investment rather than paying off the debt.So, if you have $10,000 available to invest orpay off debt and the outlook for earning anafter-tax rate of return greater than 4.32% isgood, it may be better to invest the $10,000rather than using it to pay off the debt.Of course, it isn't an all-or-nothing choice. Itmay be useful to apply a strategy of paying offdebts with high interest rates first, and theninvesting when you have a good opportunity tomake investments that may earn a higherafter-tax rate of return than the after-tax interestrate on the debts remaining.Say, for example, you have a credit card with a$10,000 balance on which you pay 18%nondeductible interest. You also have amortgage with a $10,000 balance on which youpay deductible interest of 6%, and your tax rateis 28%. So, if you have $20,000 available toinvest or pay off debt, it may make sense to payoff the credit card with $10,000 and invest theremaining $10,000.When investing, keep in mind that, in general,the higher the rate of return, the greater therisk, which can include the loss of principal. Ifyou make investments rather than pay off debtand your investments incur losses, you may stillhave debts to pay, but will you have the moneyneeded to pay them?
Some other considerations
When deciding whether to pay down debt or tosave and invest, you might also consider thefollowing.What are the terms of your debt? Are thereany penalties for prepayment?Do you actually have money that you couldinvest? Most debts have minimum paymentsthat must be paid each month. Failure tomake the minimum payment can result inpenalties, increased interest rates, anddefault. Are your funds needed to make thosepayments?How much debt do you have? Is it aproblem? How do you feel about debt? Is itsomething you can easily live with or does itmake you uncomfortable?If you say you will save the money, will youreally invest it or will you spend it? If you payoff the debt, you will have assured instantsavings by eliminating the need to come upwith the money needed to pay the interest onthe debt.Would you be able to borrow an additionalamount, if needed, and at what interest rate,if you paid off current debt? Do you have anemergency fund, or other source of funds,that could be used if you lose your job orhave a medical emergency, or would youhave to borrow?If your employer matches your contributionsin a 401(k) plan, you should generally investin the 401(k) to get the matching contribution.For example, if your employer matches 50%of your contributions up to 6% in a 401(k)plan, getting the 50% match is like getting aninstant 50% return on your contribution. Inaddition, there are tax advantages toinvesting in a 401(k) plan.
Should you pay off debt or should you save and invest? To find out,compare what rate of return you can earn on your investments versus the interest rate on the debt.There may be other factors that you should consider as well.
Page 3 of 4, see disclaimer on final page

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