America The Income Society
The first page of Form 1040 displays the essential questions regarding the most prolific tax ever conceived by the human mind, INCOME TAX. In the section of Form 1040 labeled, ‘INCOME,” the form questions the taxpayer as to the payers various sources of income. Questions #7 through 21 are exclusively about income, but we should note that there are only two categories of income; EARNED and PASSIVE (Unearned).
There are exceptions but in general, lines 7, 12, 17 & 18 are the sources of EARNED INCOME. All others are sources of PASSIVE or UNEARNED INCOME. It is a valid observation that PASSIVE INCOME is the result of earnings on unused income. Unless a person inherits well or wins a giant lottery, a person must earn income to fund investments, the proceeds of which generate unearned income.
When this balance is achieved we call it “RETIREMENT INCOME”.
If PASSIVE INCOME does not achieve the weight of EARNED INCOME people face the choice of not retiring (if they have a choice) or retiring to a reduced lifestyle.
OBSERVATION: Future Earned Income, the greatest asset should be insured to the
HIGH LIMIT DISABILITY INSURANCE.
Financial Planning Begins and Ends with INCOME PLANNING!
CONGRESS APPROVES $330 BILLION IN TAX CUTS
The new tax regulations will have an impact on many taxpayers. Taxpayers in the top tax bracket, for example, will save 3.6% alone on taxable income subject to the top rate as it drops from 38.6% to 35%. This is $3.60 in tax savings for the first $100 in taxable income subject to the top rate $36 per
$1,000, $3,600 on $100,000 and $36,000 on $1 million in income that is subject to the top rate.
Combining this tax saving with the potential tax savings for other anticipated changes in the package such as the reduction in the dividends and capital gains tax the rates impact will be significant. As people contemplate retooling their financial plans, they will want to give serious consideration to the relationship between earned and unearned income. Protecting client’s earned income is a doable task with High Limit disability Insurance. Protecting unearned income, particularly with the current state of the worldwide capital markets is a greater challenge.
Tax reduction is a dual windfall. The tax paid is less and the net spendable income is more. Additional disability income may be in order to ADEQUATELY PROTECT the Insured’s Net Spendable Income.
While congress attempts to stimulate the economy by providing for more disposable income, we are stimulated to think about how much earned income protection should be purchased to protect the most valuable asset – the future income earning ability of each client.
THE DYNAMICS OF FUTURE EARNED INCOME
Age: 40 Earned Income: $300,000 Annually; $25,000 Monthly
Expected date of Retirement: Age 65; 25 years to go
Annual adjustment to anticipate inflation and improvement: 5%
Gross Future Earned Income $14,316,130
Less Taxes 6,155,935
Net Spendable Income $ 8,160,190
Planned Disability Insurance (65%) $5,304,126
Average Monthly Benefit need (300 months) 17,680
Probable maximum available 10,000
High Limit Disability needed $7,680