Increasingly, young Americans are opting to join the “gig economy,” rather than working as captive employees for a single employer. Independent workers are variously called self-employed (my favorite term), consultants, contractors, freelancers, and a host of other non-employee descriptors. For them, flexibility with their time and location drives them to operate as “1099 employees,” meaning they get an annual Form 1099 instead of a W-2. Many receive multiple 1099s each year, having performed services for multiple employers.
Self-employment requires discipline, as well as a basic understanding of the Tax Code. 1099 workers generally earn a substantial hourly rate for time worked, but they are responsible for their own interactions with the U.S. Treasury. Financial obligations on 1099 earnings are significant, and failure to meet every requirement leads to costly consequences.
In our day jobs as Certified Financial Plannersâ, we have interviewed independent contractors from all walks of life. Many earn very substantial incomes, but some are not attuned to their total financial obligation under the U.S. Tax Code. Some find out that they are not as well off as they thought because Uncle Sam lays claim to a large portion of their gross earnings.
Too often, the decision to freelance is made without sufficient information, setting up the worker for financial trouble. Here are some potential problems:
- Instead of 7.65% being deducted from their paycheck for mandatory Social Security and Medicare, self-employed workers must pay 15.3% of earnings “out of pocket” for these items.
- Contractors are required to pay quarterly Estimated Tax Payments to the U.S. Treasury on Form 1040-ES.
- Contractors generally receive no fringe benefits from their gig employers and are therefore responsible for their own insurance coverages and retirement savings plans.
- No Employer Matching Contributions are available for Retirement Accounts of contractors, but as a trade-off, individual contribution limits are higher.
This week, Americans are facing changes in the law, potentially limiting gig workers’ opportunities. We will report in depth next week, once the dust has settled.
Only after a thorough understanding of the costs involved in gig work can a self-employed worker evaluate what a reasonable rate of compensation is for the skill needed and the type of work.
Van Wie Financial is fee-only. For a reason.
Americans are woefully uninformed about money, economics, and taxes. No good can come from this, so we at Van Wie Financial are dedicated to improving that situation. Some argue that taxes are boring, complex, and difficult to understand, but others love to talk about (and dream about) money. Too many people are seemingly content to complain when their money runs low, or worse yet, runs out.
Common wisdom says that the quickest way to make more money is to save more money. Step 1 in learning about money is to analyze your own spending to see where you might make cuts. Most young people believe that the process begins with your “take-home pay.” After all, that’s what you have available to spend between paydays, right?
By the time you receive your payday spending money, your earnings have been reduced, and often sharply. Examine your most recent Form W-2. For starters, there is mandatory withholding, often called payroll tax.” It is really not a tax, but rather a compulsory insurance premium. The Social Security tax component (also called FICA) pays into your account at Social Security, and the Medicare tax component similarly goes to your future Medicare benefits. With these items, your earnings have already been reduced by 7.65%, up to the current earnings limit of $168,600 for FICA, though Medicare withholding applies to 100% of earnings. Your employer paid an equal amount on your behalf.
Moving along on your W-2, there are boxes for Federal Tax Withheld, and in some states, State Tax Withheld, over and above the Payroll Taxes. Income above a modest Standard Deduction is taxed at the Federal level. Some of your earnings are sent to the U.S. Treasury every paycheck, because the government wants their share at the same time you get yours. Remember, we haven’t even discussed any Fringe Benefits you receive as part of your employment, some of which may require partial payments from you. You may see deductions for Health and/or Life Insurance, Dependent Care, and a host of others.
Only after these sums are gone do we find voluntary paycheck reductions for you, most popularly 401(k) deferrals from current pay. This amount will vary, and you are in control. How do you decide the optimal level of contributions? That requires some analysis of the Tax Code and its application to your situation.
What better way to save money than to understand your “paycheck?” With electronic payroll, you may have to hunt for the electronic pay stub, though your employer will direct you to it if necessary. You may be surprised to see how much you are really paid, and how little is left over for you.
Didn’t get a W-2, but a 1099 instead? We’ll cover that next week.
Van Wie Financial is fee-only. For a reason.
Today, we are exploring real estate for younger Americans. Homeownership is a lofty goal, and has long been considered a central tenet of the “American Dream.” Many people believe that America is in the midst of a real estate affordability crisis, suppressing the ability of younger Americans to realize their own American Dreams. If current trends continue for a very few years, half of all homes are projected to be owned by people ages 60 and up.
A common dilemma we encounter in our day jobs as Certified Financial Planners® involves young adults (both single and married) who are in full pursuit of their own American Dream. Unfortunately, the early years of adulting present a variety of competing demands on a meager starting salary. Food, clothing, and shelter are the three necessities unable to be put aside for later. Add in marriage, family, student loan repayment, starting a retirement savings plan, and suddenly purchasing a home seems nearly prohibitive. But is it?
Whether or not affordability presents an insurmountable obstacle is debatable. We believe that perception is based partially based on “recency bias,” meaning that last year’s 3% mortgages are fresh in people’s minds, but are no longer available. This notion belies decades of history, as America’s housing inventory and ownership base thrived before today’s home prices and mortgage interest rates. Baby Boomers in the 1980s were paying double-digit mortgage rates, yet managed to purchase and/or build homes. Interest rates will continue to change over time, and savvy homeowners will have the ability to refinance at lower rates when the time is right.
In the intense competition for young people’s cash, the use of homeownership dollars competes with rental dollars to cover the necessity of shelter. With the recent escalation of rents nationwide, a significant portion of household budgets is already deployed to the category of shelter. Elimination of rental dollar drain from budgets frees up significant cash for costs of ownership, with the promise of home equity. From a cash flow standpoint, this renders ownership more affordable than it may seem. The biggest hurdle for many young people is amassing a down payment. For some, parents are willing to help, and in fact, more parents than ever before are assisting a purchase in order to eliminate the “kids living at home” phenomenon.
Creative financing options, especially those with limited down payment requirements, are also becoming more available. Current credit restrictions have loosened significantly, bringing an increased number of young people back into the market. Housing inventory in post-COVID America is returning to normal. Young people who have not previously qualified as buyers should shop around, as conditions have changed significantly.
Van Wie Financial is fee-only. For a reason.
Typical Americans have three primal fears: death, public speaking, and running out of money. Once again, a recent survey concluded that a majority of Americans fear running out of money more than they fear death or public speaking. This has been confirmed numerous times over several decades. Why should no money be scarier than death itself? Perhaps, I speculate, because we have no control over mortality, but our money is more manageable.
Why, then, don’t more people seek assistance from professional advisors and financial planners? Many believe that paying a professional money manager, rather than playing the Home Game, may result in a net cost to their retirement assets. This fallacy has been endlessly contradicted. Investment results generally improve when competent professionals are involved. In fact, a recent study from SmartAsset.com found that people who work with a competent financial advisor could wind up with about 15% more income in retirement.
Given the stature of “moneyless phobia,” the advisor solution should be ingrained throughout society. Find a competent advisor, implement the suggestions he or she co-develops with you, and your financial future will be improved. Yet, this concept is not widespread, with only about 35% of Americans utilizing professional financial advisors. Fully 62% of Americans admit that their financial planning needs improvement, so why wait?
This is not to say that every financial advisor will produce great results. Finding the right fit is vital to an investor, and fortunately, many resources are available to aid your search. Fortunately, the American public is taking the word fiduciary to heart, and with good reason. Simple in concept, the term fiduciary packs a wallop for investors. Working with a fiduciary advisor means that you will never have to worry about which side of the table you each represent. It’s always about you, and your needs come first. Fiduciary advisors put you first. Full stop.
Also important to long-term success with an advisor is sticking to fee-only professionals. Other business models allow the advisor to be compensated (in whole or in part) by commissions, creating at least the potential for conflicts of interest. Search for a fee-only (not fee-based) advisor, operating as a Registered Investment Advisor (RIA). This may sound like self-promotion, but it is truthful.
As fee-only, CFP®, fiduciary planners, Van Wie Financial understands the financial fears of most Americans. We firmly believe that education is the key to successful investing. Therefore, we are constantly educating our clients, as well as our radio listeners, as to what constitutes good investing practice.
We can’t help anyone resolve their fear of public speaking, and none of us can increase your life span. We can and will help investors succeed financially.
Van Wie Financial is fee-only. For a reason.
No longer willing to spend my time uncovering every bad idea concocted by Congress, Media, Politicians, and others who hope to become noticed, I have narrowed the search to only the worst of the recent batch. At least for a while, until I get rejuvenated. It takes too much time and effort to find and refute each and every dumb thing these days, so I am being selective.
Our “Best of the Worst” stupidity entry is a proposal to bolster Social Security–itself a good idea. Before getting into the weeds, I refer our readers back to my past 2 Blogs, available on strivuswealth.com. Both fall into the general category of faulty “Tax the Rich” problem-solving, as does our current highlighted proposal.
Today’s Hall of Fame entry is presented by two ostensible researchers, who propose to save Social Security by reducing or eliminating tax breaks for contributions to Qualified Retirement Accounts. You know, those pesky and discriminatory 401(k) Plans, 403(b)s, IRAs, and the like? Higher-income Americans seem to enjoy greater benefits from contributions than do their lower-earning counterparts. Maybe they make more and larger contributions?
There is Dumb, there is Really Dumb, there is Government Dumb, and then there is Hall of Fame Dumb, like this proposal. From its very enactment in 1935, Social Security was intended to be an insurance system, providing a supplemental retirement income plan for those who needed it the most at the time of retirement.
As with any insurance program, it stands alone and independent financially, taking in premiums, and doling out benefits. Social Security inflows include mandatory FICA withholding, income tax collected on benefits paid out, and an occasional one-time boost to adjust for a change made by Congress. A classic example of Congressional program expansion was adding Disability Benefits to Social Security, and the Trust Fund had to be bolstered until collections covered initial and ongoing disability claims.
Today’s winners have thoughtfully(?) set out a plan to – wait for it — Tax the Rich. Since only the top half of American Workers pay income taxes, using General Revenues to bolster Social Security amounts to simply letting “The Rich” pay yet another gigantic portion of the American lifestyle, the Social Security System. Lower-income earners get off unscathed.
Regardless of how much wealth is controlled by “The Rich,” it is a pittance compared to the rate of government spending. Confiscating 100% of assets held by the uber-wealthy would fund the government for a few weeks, after which those spent assets would earn no more income or tax revenue.
Hall of Fame Dumb.
Van Wie Financial is fee-only. For a reason.
Social Security is failing, due to an imbalance between the inflow of funds relative to mandatory outflows for monthly benefits. Simple logic dictates that step one in curing an insolvency problem would NOT involve reducing incoming dollars. Yet, a current proposed Bill does exactly that. Or so it seems.
Most Americans are unaware that Social Security funding currently consists of several components. Everyone who ever had a job knows about mandatory Payroll Withholding, but that is just the beginning. Income Tax on benefits paid out are also turned over to the Social Security Administration. Occasionally, direct deposits are made by Congress, usually due to large, mandated changes in Social Security rules. Above minimum income limits monthly benefits are partially (either 50% or 85%) taxed at marginal income tax rates. These funds are all allocated to Social Security, separated from General Revenues, which are primarily individual and corporate Income Taxes.
Dubbed “You Earned It, You Keep It,” the current proposal would seemingly eliminate one primary source of Trust Fund revenue by eliminating income tax on all monthly benefits paid out. Originally promised by the designers of the Social Security System, it seems logical. But look under the hood.
Saving a gigantic system by starving it for revenue seems superfluous. Is that really what “You Earned It” means? Unsurprisingly, no. It is merely a smokescreen designed to sell the proposal to Americans who are being kept in the dark. Reading beneath the headlines, we find that revenue loss from the taxation of benefits is quietly replaced from General Revenues. The lower-income half of Americans do not pay into the General Fund. The result? Tax the Rich.
But that’s not all. To justify the claim of extending the solvency of the current system, mandatory payroll taxes (FICA Withholding) would be applied to all earned income. The 2024 income limit is $168,800, after which no more FICA Withholding applies. Again, Tax the Rich.
Nowhere in the “You Earned It” proposal is there any mention of raising the eligibility age for younger workers. Increasing longevity of recipients is the cause of the impending shortfall. This very situation was present in the early 1980s, when President Reagan and Congress raised the Full Retirement Age from 65 to 67, phased in gradually over decades. That simple process increased Social Security solvency by about 75 years while giving young workers ample planning time.
With an eye to long-term solutions, we can see from “You Earned It” that we must be diligent, as Congress is willing to sneak in provisions that would simply apply the worn-out pursuit of letting The Rich pay for everything. It won’t work, because it can’t ever work. When will they learn?
Van Wie Financial is fee-only. For a reason.
Today’s self-described “Progressives” seem to have adopted the universal answer, “Tax the Rich.” It doesn’t matter what the question might be; the answer lies in a burning desire to punish successful Americans through taxation, in the name of solving societal problems. Constantly tilting at the windmills of increased government revenue, these people live in a political Utopia we call the “Big Lie.”
To illustrate The Big Lie, we can examine President Biden’s recent claim that “The Rich” only pay an 8% tax rate, far less than the rest of us. An old adage says that there are 3 kinds of lies: White Lies, Damn Lies, and Statistics. In today’s world, a fourth type of lie, and perhaps the most insidious, is the Lie of Omission. The Big Lie is a combination platter, based on the Progressive notion that when a lie is repeated often enough, it is true.
Many politically liberal activists have long favored and frequently introduced, the concept of a Wealth Tax. So far, it has not been implemented, partly because it would be virtually impossible to administer, but also as it is not likely to pass Constitutional muster. Progressive activists remain steadfast in their attempts to fleece our hated Billionaires, who ironically fund a large portion of political campaigns for those very politicians.
The fundamental precept of a Wealth Tax is to levy a tax on appreciated, but unsold, assets. In our Blog of December 13, 2023, we referred to the Wealth Tax concept as, “Taxation Without Monetization.” Taxes are generally derived from the proceeds of income-generating transactions, whether earning income or selling assets. When payment is made, we call the income “realized,” meaning received. The worker, or the seller, keeps the post-tax proceeds of the transaction after the government collects its legal percentage from the realized cash flow.
American taxpayers understand that one of the most favorable tax rates on realized income is the Long-Term Capital Gains Tax (LTCG), which is applied to the realized (monetized) gain on assets held at least one year. For most Americans, that rate is 15%, but it rises to 20% for higher-income Americans. “The Rich” pay an additional tax of 3.8% on investment income, brought to them by ObamaCare, and designed to further fund Medicare.
Throughout modern American history, tax rates have fluctuated wildly. From government records, we find that when tax rates were raised, revenue shortfalls resulted. When authorities react to reduced tax receipts, they lower tax rates. Following each tax rate decrease, revenues to the government rise. Such a simple and demonstratable principle, yet the Big Lie never dies.
Van Wie Financial is fee-only. For a reason.
In last week’s Blog, we identified certain topics in Elder Care that play a large role in our comprehensive personal financial planning practice. Today’s topics are no less serious and pertain to a wide variety of our clients, radio listeners, and community residents. Keep in mind that these are areas of practice for Elder Law Attorneys and that we are not lawyers. We will, however, work with your attorneys when we have a client relationship.
Before we address any issues, it is wise to address the 800-pound gorilla in the discussion – cost. Qualified Elder Law practitioners will discuss your situations at no initial expense, and either make an offer to help or direct you to charitable agencies that render low or no-cost assistance. There is truly no reason to ignore an important issue due to cost expectations. In fact, most people have much more to lose than the cost of receiving assistance.
Veterans’ Benefits is an area of concern for a significant portion of Northeast Florida’s population. Most veterans (and their families) are unaware of the vast array of benefits available to those who have served in the armed forces. The U.S. Government is not the greatest communicator with respect to available veterans’ benefits. Certain Elder Law attorneys are qualified to direct veterans to the panoply of available benefits.
Veterans, their families, and surviving spouses should seek assistance not only with available benefits but also in navigating the interaction between veteran-only benefits and generally available programs. Of particular importance to older vets is the VA Aid & Attendance Program, which provides Long-Term Care benefits for nursing care, either at home or in a facility. For many families, this makes the difference between financial comfort and poverty. For many, it facilitates staying in a personal home, as most prefer.
Estate Planning is a complex area of personal finance and one that our clients take seriously. Elder Law can be an integral portion of overall Estate Planning, depending on the status of family members. Factors such as age, health, veteran status, asset levels and types, tax considerations, and a host of other considerations interplay in Estate Planning.
Among the most complex topics in Elder Law is Special Needs Planning, although the affected individual can be of any age. Providing a lifestyle, including comfort and safety, can be a complex endeavor. Elder Law Attorneys are a valuable source of information and may be assisted by your Certified Financial Planner®.
Never assume that before you can receive help you need to spend all your money and liquidate your assets. We can assist you with recommendations.
Van Wie Financial is fee-only. For a reason
On a recent broadcast of the Van Wie Financial Hour radio program, we featured a Board-Certified Elder Law Attorney. Having spoken with her in the past, we knew that some of what she had to say would pleasantly surprise many of our listeners. As non-attorneys ourselves, we are passing along some fundamental clarifications regarding misunderstood areas of Florida’s asset protection laws for our millions of older residents.
We have identified at least five specific areas of Elder Law in which our clients have expressed interest: Medicaid Planning, Veterans’ Planning, Special Needs, Probate/Trusts/Estates, and Elder Abuse. As professional financial planners, among the most interesting misconceptions we find are in the arena of Medicaid qualification for nursing home care. As parents, friends, and citizens, the most worrisome arena is Elder Abuse.
Most Americans understand that Medicaid is a State-run program for people with very little wealth and few assets. Very few understand that Florida is exceptionally friendly to elders in identifying those who could qualify for Medicaid nursing home benefits. Knowing some of the basic rules can protect our citizens from needlessly divesting assets to seek needed care for elderly spouses, parents, etc. Call an Elder Attorney before making assumptions based on false rumors.
Medicaid qualification begins with an assessment of assets owned by the applicant. The maximum is $2,000, an absurdly low figure in today’s economy. But that figure is misleading, as it does not include protected assets, which include a Homesteaded residence, an automobile, and Qualified Retirement Accounts.
Further, assets may be legally shifted between spouses to avoid the 5-year “lookback period,” during which assets removed from the intended patient’s control would otherwise be counted toward the low qualification limit. Done correctly, assets can be sheltered from the lookback period, and preserved for remaining family members. Before depleting assets for someone you believe to be a nursing home candidate, consult an Elder Attorney to determine your minimum requirements.
Elder abuse is rampant across America and takes place in any environment and within all socio-economic levels. It is a costly national problem, both in terms of financial losses and maltreatment. Abuse can and does take place anywhere and everywhere, from paid facilities to personally owned properties. When and where abuse is suspected, call an Elder Attorney immediately to determine your rights. We will be covering the other serious Elder Care topics in future Blogs.
Van Wie Financial is fee-only. For a reason.
With each incoming new year comes a new set of guidelines on contributions to Qualified Retirement Plans, both company-sponsored and individual. Changes are ostensibly made to reflect inflation over the prior year, although the increases are generally much smaller than increases in the actual cost of living. Up to the limits specified by the IRS, Americans of all ages should strive to maximize legal contributions. This applies to both deductible and after-tax (Roth) contributions.
The primary taxpayer-friendly feature of all Retirement Plans is the tax-free or tax-deferred growth over many years. Compounding earnings over long periods of time is a major component of wealth accumulation. As wondrous as it is, compounding takes a long time to realize its true power. In a tax-free or tax-deferred environment, that time frame is reduced greatly.
People who are dedicated to wealth accumulation must start early and hang in there for many years. Along the way, they should be dedicated to maxing out annual contributions to whichever Qualified Retirement Accounts they use. That’s where the IRS comes in, placing a wet blanket on our ability to contribute more than their guideline amounts. When those guidelines get revised, the best thing a saver can do is to immediately increase contributions for the year of change. That is right now for 2024, and while the changes are small, they remain important to reaching our wealth targets.
For 2024, IRA owners can contribute an additional $500, bringing the annual limit to $7,000, plus a $1,000 “catch-up” contribution for people ages 50 and up. Company-sponsored Plans, such as 401(k), 403(b), and others, may now be funded with an additional $500, for a maximum of $23,000. For age 50-and-up participants, catch-up contributions are once again $7,500.
While the 2024 increases are far from generous, everyone should make an effort to reach the new limit during the year. Limiting contributions to the percentage a company matches is not an effective method of maximizing results. People not already maxing out contributions should dedicate themselves to increasing their contributions annually.
Saving for retirement demands diligence and planning. Improving results has several components. Starting early, maximizing contributions, making contributions as early as possible in the year, and taking an appropriate amount of investment risk are key components for the accumulation of wealth. Most people can be helped by using a competent financial advisor. Van Wie Financial has a proven record of assisting people with setting and achieving responsible retirement goals.
Van Wie Financial is fee-only. For a reason.